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...

We consider a simple two-period model where workers are motivated by incentives and potential future rents. To economize on incentives, firms adopt conditional no-layoff policies. When the intertemporal variation in the opportunity cost of capital is low and the probability of firm survival is...