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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.



Item Type: MPRA Paper -

Original Title: Market-based incentives-

Language: English-

Keywords: Market-based incentive, Career Concerns, Endogenous outside option, Limited commitment, Private information, Wage contract-

Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism DesignD - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D86 - Economics of Contract: TheoryJ - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J31 - Wage Level and Structure ; Wage DifferentialsJ - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J33 - Compensation Packages ; Payment MethodsM - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M1 - Business Administration > M12 - Personnel Management ; Executives; Executive CompensationM - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M5 - Personnel Economics > M52 - Compensation and Compensation Methods and Their Effects-





Autor: Grochulski, Borys

Fuente: https://mpra.ub.uni-muenchen.de/45576/



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