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Perks: Contractual Arrangements to Restrain Moral Hazard

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  • Joon Song

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    Abstract

    Perks are a commodity bundle offered by an employer to an employee. They are used to directly control an employee's consumption. Consuming certain goods increases the marginal disutility of non-contractible effort. Lower consumption of such goods will make it less costly to induce an employee to put in high effort. To compensate for the decrease in such goods, an employer gives luxurious perks. By "luxurious" I mean that per-dollar marginal utilities of these perks are lower than those of other goods. This model explains the existence of perks such as box seat tickets and club memberships, which neither save tax nor enter the production function. Also, perks can be more luxurious at an unsuccessful outcome than at a successful outcome, and an employee with a more successful history receives more perks.

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    Paper provided by University of Essex, Department of Economics in its series Economics Discussion Papers with number 650.

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    Date of creation: 28 Feb 2008
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    Handle: RePEc:esx:essedp:650

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    1. Mariano Tommasi & Federico Weinschelbaum, 2007. "Principal-Agent Contracts under the Threat of Insurance," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 163(3), pages 379-393, September.
    2. Bengt Holmstrom, 1997. "Moral Hazard and Observability," Levine's Working Paper Archive 1205, David K. Levine.
    3. Alberto Bennardo & Pierre-Andre Chiappori, 2003. "Bertrand and Walras Equilibria under Moral Hazard," Journal of Political Economy, University of Chicago Press, vol. 111(4), pages 785-817, August.
    4. Grossman, Sanford J & Hart, Oliver D, 1983. "Implicit Contracts under Asymmetric Information," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 123-56, Supplemen.
    5. Fischer, Paul E, 1992. " Optimal Contracting and Insider Trading Restrictions," Journal of Finance, American Finance Association, vol. 47(2), pages 673-94, June.
    6. Anthony Marino & Jan Zabojnik, 2006. "Work-Related Perks, Agency Problems, and Optimal Incentive Contracts," Working Papers 1107, Queen's University, Department of Economics.
    7. Raghuram Rajan & Julie Wulf, 2004. "Are Perks Purely Managerial Excess?," NBER Working Papers 10494, National Bureau of Economic Research, Inc.
    8. In-Uck Park, 2004. "Moral Hazard Contracting and Private Credit Markets," Econometrica, Econometric Society, vol. 72(3), pages 701-746, 05.
    9. Paul Oyer, 2005. "Salary or Benefits?," NBER Working Papers 11817, National Bureau of Economic Research, Inc.
    10. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January.
    11. 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.
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