Market-based incentives

Borys Grochulski and Yuzhe Zhang ()

No 13-05, Working Paper from Federal Reserve Bank of Richmond

Abstract: We study optimal incentives in a principal-agent problem in which the agent's outside option is determined endogenously in a competitive labor market. In equilibrium, strong performance increases the agent's market value. When this value becomes sufficiently high, the threat of the agent's quitting forces the principal to give the agent a raise. The prospect of obtaining this raise gives the agent an incentive to exert effort, which reduces the need for standard incentives, like bonuses. In fact, whenever the agent's option to quit is close to being \"in the money,\" the market-induced incentive completely eliminates the need for standard incentives.

Keywords: Labor; market (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-cta, nep-dge, nep-hrm and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.richmondfed.org/publications/research/w ... 2013/pdf/wp13-05.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.richmondfed.org/publications/research/working_papers/2013/pdf/wp13-05.pdf [301 Moved Permanently]--> https://www.richmondfed.org/publications/research/working_papers/2013/pdf/wp13-05.pdf)

Related works:
Journal Article: MARKET‐BASED INCENTIVES (2017)
Working Paper: Market-based incentives (2013)
Working Paper: Market-based incentives (2013)
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:fip:fedrwp:13-05

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Paper from Federal Reserve Bank of Richmond Contact information at EDIRC.
Bibliographic data for series maintained by Christian Pascasio ().