Does wage bonus positively impact the economy?

Abstract

Purpose Total factor productivity (TFP), for a country and for a firm as well, is a crucial element for economic growth by inducing high output. Actually, workers' effort is among the important factors that positively influence the TFP. Design/methodology/approach In this paper, the authors assume that the wage bonus enhances the worker's effort. Wage bonus is an incentive mechanism and plays a role in the TFP as is shown in a recent paper by Le Van and Pham (2021). The firm will maximize its profits. The supplies of capital and workers are exogenous. At equilibrium, the authors obtain that wage bonus has positive effects on output, labor productivity and price of the output. Findings The wage bonus system can make the optimal sequence of outputs grow without bounds. And if the optimal sequence converges to a steady state, this one can be characterized by higher output per capita than that in the steady state without the bonus. Originality/value In particular, the result show if, thanks to the wage bonus externality effect, the production may become of increasing returns and if the incentive mechanism is very strong, any optimal path of physical capitals will converge to infinity.