Incentive Pay, Worker Effort, and Trade Protection

Positive and normative aspects of trade policy are examined when firms offer incentive pay to workers, such as piece-rate pay and profit sharing, to deal with worker moral hazard. Protection increases the incentive pay rate. Its effect on effort depends upon the degree of labor mobility and the type of the incentive pay. In the presence of a piece-rate pay, protection induces second-order welfare losses. But in the presence of profit sharing, there is a direct impact of protection on the incentive-compatibility constraint facing firms and hence there is a first-order positive effect on welfare.