Stress, effort, and incentives at work

An extensive medical and occupational-health literature finds that an imbalance between effort and reward is an important stressor which produces serious health consequences. We incorporate these effects in a simple agency model with moral hazard and limited liability and study the impact on agents’ effort and utility, as well as incentive pay provision, assuming agents differ in stress susceptibility. We test main model’s implications using the 2015 wave of the European Working Condition Survey. We find that individuals who are more susceptible to stress work harder and have lower subjective well-being. The likelihood of receiving incentive pay is not monotone in stress susceptibility.