Reciprocity in Dynamic Employment Relationships

Matthias Fahn

No 198, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition

Abstract: This paper explores the optimal provision of dynamic incentives for employees with reciprocal preferences. Building on the presumption that a relational contract can establish a norm of reciprocity, I show that generous upfront wages that activate an employee’s reciprocal preferences are more important when he is close to retirement. In earlier stages, “direct” performance-pay promising a bonus in exchange for effort is used more extensively. Then, a longer remaining time horizon increases the employer’s commitment which is generally determined by her future profits. Moreover, since future profits are affected by the employee’s reciprocal preferences, the norm of reciprocity already shapes the incentive system at the beginning of his career. I also show that more competition might magnify the use of reciprocity-based incentives, and that a formal commitment to paying nondiscretionary wages in the future can boost the employer’s credibibility.

Keywords: reciprocity; relational contracts; dynamic incentives (search for similar items in EconPapers)
JEL-codes: C73 D21 D86 D90 D91 (search for similar items in EconPapers)
Date: 2019-11-08
New Economics Papers: this item is included in nep-hrm and nep-mic
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Related works:
Working Paper: Reciprocity in Dynamic Employment Relationships (2020)
Working Paper: Reciprocity in Dynamic Employment Relationships (2020)
Working Paper: Reciprocity in dynamic employment relationships (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:rco:dpaper:198

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