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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? We present a model that may explain this. In a repeated game model of relational contracting, we analyze the conditions for implementing peer dependent 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 team-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. Ola Kvaløy & Trond E. Olsen, 2008. "Cooperation in Knowledge-Intensive Firms," Journal of Human Capital, University of Chicago Press, vol. 2(4), pages 410-440.
  2. Ola Kvaløy & Trond E. Olsen, 2008. "Relative performance evaluation, agent hold-up and firm organization," NBER Chapters, in: Organizational Innovation and Firm Performance, pages 229-241 National Bureau of Economic Research, Inc.
  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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