Implicit vs. Explicit Incentives: Theory and a Case Study
AbstractWe derive the optimal contract between a principal and a liquidity-constrained agent in a stochastically repeated environment. The contract comprises a court-enforceable explicit bonus rule and an implicit fixed salary promise that must be self-enforcing. Since the agent’s rent increases with bonus pay, the principal implements the maximum credible salary promise. Thus, the bonus increases while the salary promise and the agent’s effort decrease with a higher probability of premature contract termination. We subject this mechanism to econometric testing using personnel data of an insurance company. The empirical results strongly support our theoretical predictions.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2645.
Date of creation: 2009
Date of revision:
implicit contract; explicit bonus pay; premature contract termination; compensation and productivity estimates;
Find related papers by JEL classification:
- J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
- M50 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - General
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