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Work-related perks, agency problems, and optimal incentive contracts

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Author Info
Anthony M. Marino
Ján Zábojník

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Abstract

Work-related perks, such as corporate jets, nice offices, and so forth, improve the tradeoff between incentives and insurance that determines the optimal incentive contract. We show that (i) such perks may be offered even if their direct consumption benefits are offset by their costs; (ii) they will be offered for free; (iii) agents in more uncertain production environments will receive more perks; (iv) senior executives should receive more perks; and (v) better corporate governance can lead to more perk consumption by CEOs. Our analysis also offers insights into firms' decisions about how much autonomy they should grant to their employees. Copyright (c) 2008, RAND.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.0741-6261.2008.00028.x
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Publisher Info
Article provided by RAND Corporation in its journal The RAND Journal of Economics.

Volume (Year): 39 (2008)
Issue (Month): 2 ()
Pages: 565-585
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Handle: RePEc:bla:randje:v:39:y:2008:i:2:p:565-585

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Paul Oyer, 2005. "Salary or Benefits?," NBER Working Papers 11817, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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    Other versions:
  3. Jed DeVaro, 2005. "The Effects of Self-Managed and Closely-Managed Teams on Labor Productivity and Product Quality: An Empirical Analysis of a Cross Section of Establishments," Labor and Demography 0510002, EconWPA. [Downloadable!]
  4. Milgrom, Paul & Roberts, John, 1990. "The Economics of Modern Manufacturing: Technology, Strategy, and Organization," American Economic Review, American Economic Association, vol. 80(3), pages 511-28, June. [Downloadable!] (restricted)
  5. Baker, George P, 1992. "Incentive Contracts and Performance Measurement," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 598-614, June. [Downloadable!] (restricted)
  6. Montgomery, Edward & Shaw, Kathryn, 1997. "Pensions and Wage Premia," Economic Inquiry, Oxford University Press, vol. 35(3), pages 510-22, July.
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  7. George P. Baker & Brian J. Hall, 2004. "CEO Incentives and Firm Size," Journal of Labor Economics, University of Chicago Press, vol. 22(4), pages 767-798, October. [Downloadable!]
  8. Yermack, David, 2006. "Flights of fancy: Corporate jets, CEO perquisites, and inferior shareholder returns," Journal of Financial Economics, Elsevier, vol. 80(1), pages 211-242, April. [Downloadable!] (restricted)
  9. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 1-29, February.
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  10. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
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  13. Canice Prendergast, 2002. "The Tenuous Trade-off between Risk and Incentives," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1071-1102, October. [Downloadable!] (restricted)
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  15. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October. [Downloadable!] (restricted)
  16. Zabojnik, Jan, 1996. "Pay-performance sensitivity and production uncertainty," Economics Letters, Elsevier, vol. 53(3), pages 291-296, December. [Downloadable!] (restricted)
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  18. Hermalin, Benjamin E & Weisbach, Michael S, 1998. "Endogenously Chosen Boards of Directors and Their Monitoring of the CEO," American Economic Review, American Economic Association, vol. 88(1), pages 96-118, March. [Downloadable!] (restricted)
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  19. Jan Zabojnik, 2002. "Centralized and Decentralized Decision Making in Organizations," Journal of Labor Economics, University of Chicago Press, vol. 20(1), pages 1-22, January. [Downloadable!]
  20. Burkart, Mike & Gromb, Denis & Panunzi, Fausto, 1997. "Large Shareholders, Monitoring, and the Value of the Firm," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 693-728, August.
  21. Anthony M. Marino & John G. Matsusaka, 2005. "Decision Processes, Agency Problems, and Information: An Economic Analysis of Capital Budgeting Procedures," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 18(1), pages 301-325. [Downloadable!] (restricted)
  22. Scott Schaefer, 1998. "The Dependence Of Pay-Performance Sensitivity On The Size Of The Firm," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 436-443, August. [Downloadable!] (restricted)
  23. Raith, Michael, 2004. "Specific Knowledge and Performance Measurement," CEPR Discussion Papers 4262, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  24. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn. [Downloadable!] (restricted)
  25. Jed DeVaro, 2005. "Teams, Autonomy, and the Financial Performance of Firms," Labor and Demography 0508004, EconWPA. [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Joon Song, 2008. "Perks: Contractual Arrangements to Restrain Moral Hazard," Economics Discussion Papers 650, University of Essex, Department of Economics. [Downloadable!]
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