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Work-Related Perks, Agency Problems, and Optimal Incentive Contracts

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Author Info

  • Anthony Marino

    ()
    (USC)

  • Jan Zabojnik

    ()
    (Queen's University)

Abstract

This paper examines the effects of work-related perks, such as corporate jets and limousines, nice offices, secretarial staff, etc., on the optimal incentive contract. In a linear contracting framework, perks characterized by complementarities between production and consumption improve the trade-off between incentives and insurance that determines the optimal contract for a risk-averse agent. We show that (i) the perk may be offered even if its direct consumption and productivity benefits are offset by its cost; (ii) the perk will be offered for free; (iii) agents in more uncertain production environments will receive more perks; (iv) senior executives should receive both more perks and stronger explicit incentives; and (v) better corporate governance can lead firms to award their CEOs more perks. Our analysis also offers insights into the firms’decisions about how much autonomy they should grant to their employees and about optimal perk provision when managers and workers are organized in teams.

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File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_1107.pdf
File Function: First version 2006
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Bibliographic Info

Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1107.

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Length: 41 pages
Date of creation: Oct 2006
Date of revision:
Handle: RePEc:qed:wpaper:1107

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Keywords: Job Perks; Agency Problems; Optimal Incentive Contracts;

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References

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  1. Baker, George P, 1992. "Incentive Contracts and Performance Measurement," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 598-614, June.
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  9. Hermalin, Benjamin E & Weisbach, Michael S, 1998. "Endogenously Chosen Boards of Directors and Their Monitoring of the CEO," American Economic Review, American Economic Association, vol. 88(1), pages 96-118, March.
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  23. Ittner, Christopher D. & Lambert, Richard A. & Larcker, David F., 2003. "The structure and performance consequences of equity grants to employees of new economy firms," Journal of Accounting and Economics, Elsevier, vol. 34(1-3), pages 89-127, January.
  24. Jed DeVaro, 2005. "Teams, Autonomy, and the Financial Performance of Firms," Labor and Demography 0508004, EconWPA.
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Citations

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Cited by:
  1. Ola Kvaløy & Anja Schöttner, 2014. "Incentives to Motivate," CESifo Working Paper Series 4656, CESifo Group Munich.
  2. Helmut M. Dietl & Martin Grossmann & Markus Lang & Simon Wey, 2012. "Incentive Effects of Bonus Taxes in a Principal-Agent Model," Working Papers 313, University of Zurich, Department of Business Administration (IBW).
  3. Joon Song, 2008. "Perks: Contractual Arrangements to Restrain Moral Hazard," Economics Discussion Papers 650, University of Essex, Department of Economics.
  4. Xu, Nianhang & Li, Xiaorong & Yuan, Qingbo & Chan, Kam C., 2014. "Excess perks and stock price crash risk: Evidence from China," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 419-434.
  5. Pattarin Adithipyangkul & Ilan Alon & Tianyu Zhang, 2011. "Executive perks: Compensation and corporate performance in China," Asia Pacific Journal of Management, Springer, vol. 28(2), pages 401-425, June.
  6. Ola Kvaløy & Petra Nieken & Anja Schöttner, 2013. "Hidden Benefits of Reward: A Field Experiment on Motivation and Monetary Incentives," CESifo Working Paper Series 4393, CESifo Group Munich.
  7. Hammermann, Andrea & Mohnen, Alwine, 2012. "Who Benefits from Benefits? Empirical Research on Tangible Incentives," IZA Discussion Papers 6284, Institute for the Study of Labor (IZA).
  8. Martin Grossmann & Markus Lang & Helmut Dietl, 2011. "Why Taxing Executives' Bonuses Can Foster Risk-Taking Behavior," Working Papers 0150, University of Zurich, Institute for Strategy and Business Economics (ISU), revised May 2012.
  9. Weinschenk, Philipp, 2013. "Compensation, perks, and welfare," Economics Letters, Elsevier, vol. 120(1), pages 67-70.

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