Adverse Selection and Pay Compression

Jay Stewart

Southern Economic Journal, 1999, vol. 65, issue 4, 885-899

Abstract: A fundamental result of the principal‐agent literature is that pay will be linked to performance when it is difficult for the principal to monitor the agent's actions. However, performance pay can lead to adverse incentives. In these models, high‐powered incentives encourage workers to neglect some aspects of their job or to sabotage their coworkers' efforts. This paper offers another explanation for the weak link between pay and performance: worker heterogeneity. When workers are heterogeneous and labor contracts are contests, the Nash equilibrium often pools workers. I show that this implies that the link between pay and performance is weaker than would be the case if firms could observe workers' types before contracting and offer each type their respective optimal contests.

Date: 1999
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1002/j.2325-8012.1999.tb00206.x

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:soecon:v:65:y:1999:i:4:p:885-899

Access Statistics for this article

More articles in Southern Economic Journal from John Wiley & Sons
Bibliographic data for series maintained by Wiley Content Delivery ().