Optimal Work Effort, Income and Wage

We study work effort with its various determinants such as the educational level of the worker, the minimum or start-up salary as well as the initial endowment of the worker. By means of optimization we find that optimal work effort depends directly on the initial income available to the worker, with a higher income reducing the effort of the worker. We also find that a higher initial wage and a reward parameter per work effort discourage workers to exert more effort on the job. Firms set optimal wages disregarding reward for work effort with more productive workers receiving higher wages and exerting more effort at the optimum.