Friedman, John N., and Steven Kelman. "Effort as Investment: Analyzing the Response to Incentives." KSG Faculty Research Working Paper Series RWP07-024, May 2007.
We analyze a model in which incentives in one period on one task can affect output more broadly through learning. If agents can invest in human or organizational capital, then output will increase both before and after short-term incentives. We develop a model of these e¤ects, and then we evaluate its predictions using data from hospitals in Britain during a series of limited-time performance incentives offered by the government. We find empirically that these policies increase performance not only during the incentivized periods but also before and after, matching the predictions of our model. We also examine performance along non-incentivized dimensions of quality of care and find little evidence of classical effort substitution.