Incentives, Compensation, and Social Welfare

Margaret Meyer and Dilip Mookherjee

The Review of Economic Studies, 1987, vol. 54, issue 2, 209-226

Abstract: Alternative wage structures under conditions of moral hazard are analysed from a social welfare standpoint. It is argued that ex post equity judgements in an uncertainty context should incorporate a preference for "positive correlation" of utilities of different individuals. In the design of compensation schemes, this may give rise to a conflict between ex post equity objectives and the need to provide effort incentives: relative performance clauses in compensation schemes that are useful for providing incentives are undesirable from an ex post equity standpoint. This is demonstrated by showing (a) in a context of independent production uncertainties, every rankorder tournament is welfare-dominated by a set of independent (randomized) contracts, and (b) welfare-optimal compensation schemes in general depend separately on an equity and an incentive component that tend to correlate agent compensations in different directions.

Date: 1987
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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:54:y:1987:i:2:p:209-226.

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