Editing Incentive (section)

==== Ratchet effect ====
Incentives are arguably beneficial in increasing productivity, however, they can also have an adverse effect on the firm.<ref name=":3" /> This is evident through the [[ratchet effect]]. A firm may use its observation of an employee's output level when they are first employed as a guide to set performance standard and objectives for the future.<ref name=":6">{{Cite journal |last1=Kanemoto |first1=Yoshitsugu |last2=MacLeod |first2=W. Bentley |date=1992 |title=The Ratchet Effect and the Market for Secondhand Workers |journal=Journal of Labor Economics |publisher=University of Chicago Press |volume=10 |issue=1 |pages=85–98 |doi=10.1086/298279 |jstor=2535130 |s2cid=154244118}}</ref> Knowing this, an employee may deliberately reduce their output level when first employed or hide their ability to produce at a higher output with the intent of exploiting being rewarded in the future when they strategically increase their output level.<ref name=":6" /> Best performances of employees can be limited from it. Thus, the ratchet effect can significantly diminish production levels of a firm and planned economies.<ref>{{Cite journal |last1=Cooper |first1=David J. |last2=Kagel |first2=John H. |last3=Lo |first3=Wei |last4=Gu |first4=Qing Liang |date=1999 |title=Gaming against Managers in Incentive Systems: Experimental Results with Chinese Students and Chinese Managers |journal=The American Economic Review |volume=89 |issue=4 |pages=781–804 |doi=10.1257/aer.89.4.781 |jstor=117159 |issn=0002-8282 |url=http://s3.amazonaws.com/fieldexperiments-papers2/papers/00038.pdf}}</ref>