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

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  • 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
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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. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-28, March.
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Citations

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Cited by:
  1. Weinschenk, Philipp, 2013. "Compensation, perks, and welfare," Economics Letters, Elsevier, vol. 120(1), pages 67-70.
  2. Ola Kvaløy & Anja Schöttner, 2014. "Incentives to Motivate," CESifo Working Paper Series 4656, CESifo Group Munich.
  3. Dietl, Helmut M. & Grossmann, Martin & Lang, Markus & Wey, Simon, 2013. "Incentive effects of bonus taxes in a principal-agent model," Journal of Economic Behavior & Organization, Elsevier, vol. 89(C), pages 93-104.
  4. 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.
  5. Kvaløy, Ola & Nieken, Petra & Schöttner, Anja, 2013. "Hidden Benefits of Reward: A Field Experiment on Motivation and Monetary Incentives," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 451, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  6. Joon Song, 2008. "Perks: Contractual Arrangements to Restrain Moral Hazard," Economics Discussion Papers 650, University of Essex, Department of Economics.
  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. 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.
  9. 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.

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