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The Rise of Individual Performance Pay

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  • Ola Kvaloy
  • Trond 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

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2145.

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Date of creation: 2007
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Handle: RePEc:ces:ceswps:_2145

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Keywords: relational contracts; multiagent moral hazard; indispensable human capital;

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References

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Cited by:
  1. Kvaløy, Ola & Olsen, Trond E., 2007. "Relative Performance Evaluation, Agent Hold-Up and Firm Organization," Discussion Papers, Department of Business and Management Science, Norwegian School of Economics 2007/26, Department of Business and Management Science, Norwegian School of Economics.
  2. Ola Kvaløy & Trond E. Olsen, 2008. "Cooperation in Knowledge-Intensive Firms," Journal of Human Capital, University of Chicago Press, University of Chicago Press, vol. 2(4), pages 410-440.
  3. Daniel Ladley & Ian Wilkinson & Louise Young, 2013. "The Evolution Of Cooperation In Business: Individual Vs. Group Incentives," Discussion Papers in Economics, Department of Economics, University of Leicester 13/14, Department of Economics, University of Leicester.

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