Bonus Culture: Competitive Pay, Screening, and Multitasking

Roland Benabou and Jean Tirole

No 7321, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper analyzes the impact of labor market competition and skill-biased technical change on the structure of compensation. The model combines multitasking and screening, embedded into a Hotelling-like framework. Competition for the most talented workers leads to an escalating reliance on performance pay and other high-powered incentives, thereby shifting effort away from less easily contractible tasks such as long-term investments, risk management and within-firm cooperation. Under perfect competition, the resulting efficiency loss can be much larger than that imposed by a single firm or principal, who distorts incentives downward in order to extract rents. More generally, as declining market frictions lead employers to compete more aggressively, the monopsonistic underincentivization of low-skill agents first decreases, then gives way to a growing overincentivization of high-skill ones. Aggregate welfare is thus hill-shaped with respect to the competitiveness of the labor market, while inequality tends to rise monotonically. Bonus caps and income taxes can help restore balance in agents' incentives and behavior, but may generate their own set of distortions.

Keywords: moral hazard; adverse selection; screening; contracts; multitask; inequality; executive compensation; bonuses; performance pay; incentives; work ethic; Hotelling; competition (search for similar items in EconPapers)
JEL-codes: D31 D82 D86 J31 J33 L13 M12 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2013-03
New Economics Papers: this item is included in nep-bec, nep-cta and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

Published - published in: Journal of Political Economy, 2016, 124 (2), 305–370

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https://docs.iza.org/dp7321.pdf (application/pdf)

Related works:
Journal Article: Bonus Culture: Competitive Pay, Screening, and Multitasking (2016)
Working Paper: Bonus Culture: Competitive Pay, Screening and Multitasking (2016)
Working Paper: Bonus Culture: Competitive Pay, Screening, and Multitasking (2013)
Working Paper: Bonus Culture: Competitive Pay, Screening and Multitasking (2013)
Working Paper: Bonus Culture: Competitive Pay, Screening, and Multitasking (2013)
Working Paper: Bonus Culture: Competitive Pay, Screening and Multitasking (2013)
Working Paper: Bonus Culture: Competitive Pay, Screening and Multitasking (2013)
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