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The Rise of Individual Performance Pay

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  • Ola Kvaløy
  • Trond E. Olsen

Abstract

Why does individual performance pay seem to prevail in human-capital-intensive industries where teamwork is so common? We present a model that aims to explain this. In a repeated game model of relational contracting, we analyze the conditions for implementing peerdependent incentive regimes when agents possess indispensable human capital. We show that the larger the share of values that the agents can hold-up, the lower is the implementable degree of peer-dependent incentives. In a setting with team effects - complementary tasks and peer pressure, respectively - we show that while group-based incentives are optimal if agents are dispensable, it may be costly, and in fact suboptimal, to provide team incentives once the agents become indispensable.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.

Volume (Year): 21 (2012)
Issue (Month): 2 (06)
Pages: 493-518

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Handle: RePEc:bla:jemstr:v:21:y:2012:i:2:p:493-518

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Citations

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Cited by:
  1. Kvaløy, Ola & Olsen, Trond E., 2007. "Cooperation in knowledge-intensive firms," Discussion Papers 2007/27, Department of Business and Management Science, Norwegian School of Economics.
  2. Kvaløy, Ola & Olsen, Trond E., 2007. "Relative Performance Evaluation, Agent Hold-Up and Firm Organization," Discussion Papers 2007/26, Department of Business and Management Science, Norwegian School of Economics.
  3. Daniel Ladley & Ian Wilkinson & Louise Young, 2013. "The Evolution Of Cooperation In Business: Individual Vs. Group Incentives," Discussion Papers in Economics 13/14, Department of Economics, University of Leicester.

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