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Contractual and Organizational Structure with Reciprocal Agents

  • Florian Englmaier
  • Stephen Leider

We solve for the optimal contract when agents are reciprocal, demonstrating that generous compensation can substitute for performance-based pay. Our results suggest several factors that make firms more likely to use reciprocal incentives. Reciprocity is most powerful when output is a poor signal of effort and when the agent is highly reciprocal and/or productive. Similarly, reciprocal incentives are attractive when firm managers have strong incentive pay and discretion over employee compensation. While reciprocal incentives can be optimal even when identical firms compete, a reciprocity contract is most likely when one firm has a match-specific productivity advantage with the agent. (JEL D23, D86, J33, M12, M52)

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Article provided by American Economic Association in its journal American Economic Journal: Microeconomics.

Volume (Year): 4 (2012)
Issue (Month): 2 (May)
Pages: 146-83

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Handle: RePEc:aea:aejmic:v:4:y:2012:i:2:p:146-83
Note: DOI: 10.1257/mic.4.2.146
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