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Subjective Evaluations: Discretionary Bonuses and Feedback Credibility

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  • Fuchs, William

    ()
    (University of California, Berkeley)

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    Abstract

    We provide a new rationale for the use of discretionary bonuses. In a setting with unknown match qualities between a worker and a firm and subjective evaluations by the principal, bonuses are useful in order to make the feedback from the firm to the workers credible. This way workers in good matches are less inclined to accept outside offers.

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    File URL: http://ftp.iza.org/dp7758.pdf
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    Bibliographic Info

    Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7758.

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    Length: 11 pages
    Date of creation: Nov 2013
    Date of revision:
    Handle: RePEc:iza:izadps:dp7758

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    Related research

    Keywords: discretionary bonuses; feedback; signalling;

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    1. MacLeod, W Bentley & Malcomson, James M, 1989. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Econometrica, Econometric Society, vol. 57(2), pages 447-80, March.
    2. William Fuchs, 2005. "Contracting with Repeated Moral Hazard and Private Evaluations," Discussion Papers 04-012, Stanford Institute for Economic Policy Research.
    3. In-Koo Cho & David M. Kreps, 1997. "Signaling Games and Stable Equilibria," Levine's Working Paper Archive 896, David K. Levine.
    4. Ben Hermalin, 1996. "Toward an Economic Theory of Leadership: Leading by Example," Working Papers _006, University of California at Berkeley, Haas School of Business.
    5. Beaudry, Paul, 1994. "Why an Informed Principal May Leave Rents to an Agent," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(4), pages 821-32, November.
    6. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
    7. Suvorov, Anton & van de Ven, Jeroen, 2009. "Discretionary rewards as a feedback mechanism," Games and Economic Behavior, Elsevier, vol. 67(2), pages 665-681, November.
    8. Paul Oyer, 2000. "Why Do Firms Use Incentives that Have No Incentive Effects?," Econometric Society World Congress 2000 Contributed Papers 1440, Econometric Society.
    9. Oyer, Paul & Schaefer, Scott, 2004. "Why Do Some Firms Give Stock Options To All Employees?: An Empirical Examination of Alternative Theories," Research Papers 1772r, Stanford University, Graduate School of Business.
    10. Jan Zabojnik, 2011. "Subjective Evaluations with Performance Feedback," Working Papers 1283, Queen's University, Department of Economics.
    11. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 972-90, October.
    12. Edward P. Lazear, 1996. "Performance Pay and Productivity," NBER Working Papers 5672, National Bureau of Economic Research, Inc.
    13. Roland Benabou & Jean Tirole, 2003. "Intrinsic and Extrinsic Motivation," Review of Economic Studies, Wiley Blackwell, vol. 70(3), pages 489-520, 07.
    14. Kahn, Charles & Huberman, Gur, 1988. "Two-sided Uncertainty and "Up-or-Out" Contracts," Journal of Labor Economics, University of Chicago Press, vol. 6(4), pages 423-44, October.
    15. Harris, Milton & Raviv, Artur, 1979. "Optimal incentive contracts with imperfect information," Journal of Economic Theory, Elsevier, vol. 20(2), pages 231-259, April.
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