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Bonus Payments versus Efficiency Wages in the Repeated Principal-Agent Model with Subjective Evaluations

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  • Lucas Maestri
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    Abstract

    We study an infinitely repeated principal-agent model with subjective evaluations. We compare the surplus in efficiency-wage equilibria and in bonus-payments equilibria. The agent receives a constant wage and is motivated by the threat of dismissal in efficiency-wage equilibria. The agent receives a bonus and quits the relationship after disagreements between his self-evaluation and the principal's performance appraisal in bonus-payments equilibria. We construct a class of equilibria with bonus payments that approach efficiency as patience increases. In contrast, payoffs from efficiency-wage equilibria are bounded away from the Pareto-payoff frontier for any discount factor. (JEL D82, J33, J41)

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    Bibliographic Info

    Article provided by American Economic Association in its journal American Economic Journal: Microeconomics.

    Volume (Year): 4 (2012)
    Issue (Month): 3 (August)
    Pages: 34-56

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    Handle: RePEc:aea:aejmic:v:4:y:2012:i:3:p:34-56

    Note: DOI: 10.1257/mic.4.3.34
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    Web page: https://www.aeaweb.org/aej-micro
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    1. Michihiro Kandori, 2001. "Introduction to Repeated Games with Private Monitoring," CIRJE F-Series CIRJE-F-114, CIRJE, Faculty of Economics, University of Tokyo.
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    8. Abreu, Dilip & Milgrom, Paul & Pearce, David, 1991. "Information and Timing in Repeated Partnerships," Econometrica, Econometric Society, vol. 59(6), pages 1713-33, November.
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