The Hidden Cost of Specialization
AbstractGiven the advantages of specialization, employers encourage their employees to acquire distinct expertise to better satisfy clients’ needs. However, when the client is unaware of the employees’ expertise and cannot be sorted out to the most competent employee by means of a gatekeeper, a mismatch can occur. In this paper we attempt to identify the optimal condition so an employer can eliminate this mismatch and offer a team bonus that provides the first-contacted employee with an incentive to refer the client to the correct expert. We show that the profitability of this referral contract increases with the agents’ degree of specialization and decreases with the clients’ competence at identifying the correct expert. Interestingly, a referral contract may be more profitable than an individual contract -that does not pay a team bonus- even if the former provides less incentive to the agents to improve their expertise. Thus, we provide a new rationale for the use of team bonuses even when the production function depends on a single employee’s effort.
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Bibliographic InfoPaper provided by University of Copenhagen, Department of Food and Resource Economics in its series IFRO Working Paper with number 2013/9.
Length: 42 pages
Date of creation: Apr 2013
Date of revision:
Team and Individual Contracts; Matching Client-Expert; Incentives to Refer;
Find related papers by JEL classification:
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
- M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-05-05 (All new papers)
- NEP-CTA-2013-05-05 (Contract Theory & Applications)
- NEP-GTH-2013-05-05 (Game Theory)
- NEP-HRM-2013-05-05 (Human Capital & Human Resource Management)
- NEP-LAB-2013-05-05 (Labour Economics)
- NEP-MIC-2013-05-05 (Microeconomics)
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