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Market Competition and Lower Tier Incentives

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  • Bernd Theilen

Abstract

The relationship between competition and performance-related pay has been analyzed in single-principal-single-agent models. While this approach yields good predictions for managerial pay schemes, the predictions fail to apply for employees at lower tiers of a firm’s hierarchy. In this paper, a principal-multi-agent model of incentive pay is developed which makes it possible to analyze the effect of changes in the competitiveness of markets on lower tier incentive payment schemes. The results explain why the payment schemes of agentslocated at low and mid tiers are less sensitive to changes in competition when aggregated firm data is used.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2453.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2453

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Keywords: Cournot competition; contract delegation; moral hazard; entry; market size; wage cost;

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