Incentive schemes, private information and the double-edged role of competition for agents

Christina Bannier, Eberhard Feess () and Natalie Packham

No 475, CFS Working Paper Series from Center for Financial Studies (CFS)

Abstract: This paper examines the effect of imperfect labor market competition on the efficiency of compensation schemes in a setting with moral hazard, private information and risk-averse agents. Two vertically differentiated firms compete for agents by offering contracts with fixed and variable payments. Vertical differentiation between firms leads to endogenous, type-dependent exit options for agents. In contrast to screening models with perfect competition, we find that existence of equilibria does not depend on whether the least-cost separating allocation is interim efficient. Rather, vertical differentiation allows the inferior firm to offer (cross-)subsidizing fixed payments even above the interim efficient level. We further show that the efficiency of variable pay depends on the degree of competition for agents: For small degrees of competition, low-ability agents are under-incentivized and exert too little effort. For large degrees of competition, high-ability agents are over-incentivized and bear too much risk. For intermediate degrees of competition, however, contracts are second-best despite private information.

Keywords: Incentive compensation; screening; imperfect labor market competition; vertical differentiation; cross-subsidy (search for similar items in EconPapers)
JEL-codes: D82 D86 J31 J33 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-bec, nep-cta, nep-hrm and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Working Paper: Incentive schemes, private information and the double-edged role of competition for agents (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfswop:475

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