Tom Rauber

• Incentives are an indispensable tool in economics, as they allow for aligning interests and improving organizational performance. By exploring numerous novel aspects of incentives in different economic subfields, this cumulative dissertation expands our theoretical understanding of incentives. First, dynamic interaction is shown to undermine the effectiveness of incentives, even to the extent that their effect is completely reversed. Higher-powered incentives then leave all interacting parties worse off, while at the same time reducing the likelihood that the interaction will be brought to a successful conclusion. This finding arises not only with exogenously given but also endogenously designed incentives. Second, a simple mechanism is proposed to circumvent adverse free-riding incentives that inevitably result from the public good nature of abatement in the context of global greenhouse gas emissions. Enabling countries to establish a joint cap-and-trade system and allowing them to determine its design endogenously through negotiations may overcome free-riding incentives and implement efficient emissions levels since countries can implicitly share efficiency gains under this regime. Third, linking the importance of saving incentives to the capital dependence of the production sector reveals a simple condition determining whether a monopolistic or competitive banking sector induces the greatest level of long-run growth and welfare in an economy. For labor-intensive production, higher-powered saving incentives provided by competitive banks drive capital accumulation and enhance welfare, while, for capital-intensive production, it is the institutional investments by a monopolistic bank that yield a more favorable outcome. Overall, as its inherent incentive perspective extends contract theory, environmental economics, and macroeconomics, this dissertation emphasizes the pivotal role that incentives play in various forms of economic interaction.