In this paper, we introduce the psychological concept of anxiety into the standard linear agency model. After replacing the agent's risk premium with anxiety, we show that the agent's optimal effort can conform to the inverted-U hypothesis, which states that an increase in anxiety improves...

We develop a theory of incentives, wages, and employment in the context of team production. A central insight is that specialization and division of labor not only improve productivity but also increase effort and the sensitivity of effort to incentives under moral hazard. We show that...

In this paper, we develop a new theory of the firm where the market is primarily an incentive system whereas the firm is an intrinsic motivation device. The firm is more efficient than the market when asset specificity and subjective risk are sufficiently high because it provides balanced...