Incentive schemes, private information and the double-edged role of competition for agents

  • This paper examines the effect of imperfect labor market competition on the efficiency of compensation schemes in a setting with moral hazard, private information and risk-averse agents. Two vertically differentiated firrms compete for agents by offering contracts with fixed and variable payments. Vertical differentiation between firms leads to endogenous, type-dependent exit options for agents. In contrast to screening models with perfect competition, we find that existence of equilibria does not depend on whether the least-cost separating allocation is interim efficient. Rather, vertical differentiation allows the inferior firm to offer (cross-)subsidizing fixed payments even above the interim efficient level. We further show that the efficiency of variable pay depends on the degree of competition for agents: For small degrees of competition, low-ability agents are under-incentivized and exert too little effort. For large degrees of competition, high-ability agents are over-incentivized and bear too much risk. For intermediate degrees of competition, however, contracts are second-best despite private information.

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Metadaten
Author:Christina E. BannierGND, Eberhard Feess, Natalie Packham
URN:urn:nbn:de:hebis:30:3-351077
Parent Title (English):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 475
Series (Serial Number):CFS working paper series (475)
Publisher:Center for Financial Studies
Place of publication:Frankfurt, M.
Document Type:Working Paper
Language:English
Year of Completion:2014
Year of first Publication:2014
Publishing Institution:Universit├Ątsbibliothek Johann Christian Senckenberg
Release Date:2014/10/20
Tag:cross-subsidy; imperfect labor market competition; incentive compensation; screening; vertical differentiation
Issue:September 8, 2014
Page Number:47
HeBIS-PPN:351156682
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Sammlungen:Universit├Ątspublikationen
Licence (German):License LogoDeutsches Urheberrecht