Pareto Gains from Limiting Compensation Options

Pal Debashis (), David Sappington and Topolyan Iryna ()
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Pal Debashis: Department of Economics, University of Cincinnati, 2906 Woodside Drive Cincinnati, Ohio 45221 USA
Topolyan Iryna: Department of Economics, University of Cincinnati, 2906 Woodside Drive Cincinnati, Ohio 45221 USA

IZA Journal of Labor Economics, 2022, vol. 12, issue 1, 29

Abstract: We examine the effects of a single payment structure policy (SPP) that prevents an employer from offering an employee a choice among compensation structures. An SPP reduces the employer's profit and increases the employee's welfare when the employee's (privately known) ability is exogenous. In contrast, an SPP can increase both the employer's profit and the employee's welfare when the employee's ability is endogenous. An SPP secures these Pareto gains by restricting the employer's ability to limit the rent the employee earns from high ability, thereby inducing the employee to increase his human capital investment.

Keywords: limited contract choice; human capital investment (search for similar items in EconPapers)
JEL-codes: D82 J41 K31 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:vrs:izajle:v:12:y:2022:i:1:p:29:n:3

DOI: 10.2478/izajole-2023-0002

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