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Bonus Culture: Competitive Pay, Screening, and Multitasking

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  • Benabou, Roland

    ()
    (Princeton University)

  • Tirole, Jean

    ()
    (IDEI)

Abstract

This paper analyzes the impact of labor market competition and skill-biased technical change on the structure of compensation. The model combines multitasking and screening, embedded into a Hotelling-like framework. Competition for the most talented workers leads to an escalating reliance on performance pay and other high-powered incentives, thereby shifting effort away from less easily contractible tasks such as long-term investments, risk management and within-firm cooperation. Under perfect competition, the resulting efficiency loss can be much larger than that imposed by a single firm or principal, who distorts incentives downward in order to extract rents. More generally, as declining market frictions lead employers to compete more aggressively, the monopsonistic underincentivization of low-skill agents first decreases, then gives way to a growing overincentivization of high-skill ones. Aggregate welfare is thus hill-shaped with respect to the competitiveness of the labor market, while inequality tends to rise monotonically. Bonus caps and income taxes can help restore balance in agents' incentives and behavior, but may generate their own set of distortions.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7321.

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Length: 59 pages
Date of creation: Mar 2013
Date of revision:
Handle: RePEc:iza:izadps:dp7321

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Keywords: incentives; performance pay; bonuses; executive compensation; inequality; multitask; contracts; screening; adverse selection; moral hazard; work ethic; Hotelling; competition;

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Inequality's effects
    by chris dillow in Stumbling and Mumbling on 2013-01-22 14:21:04
  2. Socialism, institutions & human nature
    by chris dillow in Stumbling and Mumbling on 2013-01-28 14:39:57
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Cited by:
  1. Acharya, Viral V & Pagano, Marco & Volpin, Paolo, 2012. "Seeking Alpha: Excess Risk Taking and Competition for Managerial Talent," CEPR Discussion Papers 8905, C.E.P.R. Discussion Papers.
  2. Tymula, Agnieszka, 2013. "Competitive Screening of a Heterogeneous Labor Force and Corporate Teamwork Attitude," Working Papers 2013-18, University of Sydney, School of Economics.
  3. F. Barigozzi & N. Burani, 2014. "Competition and Screening with Skilled and Motivated Workers," Working Papers wp953, Dipartimento Scienze Economiche, Universita' di Bologna.
  4. Gill, Andrej & Heinz, Matthias & Schumacher, Heiner, 2014. "Trust, trustworthiness and selection into the financial industry," CFS Working Paper Series 458, Center for Financial Studies (CFS).

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