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Optimal incentive contracts for knowledge workers

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  • Englmaier, Florian
  • Muehlheusser, Gerd
  • Roider, Andreas

Abstract

We study optimal incentive provision for “knowledge workers”, a crucial resource for many organizations. We augment a standard moral-hazard framework to reflect two key patterns: First, retention is a challenge because workers are free to leave; thereby harming their employer. Second, the value of the worker׳s outside option might depend on effort on the job. Optimal contracts that retain workers exhibit properties such as first-best effort and surplus, or non-responsiveness to changes in underlying conditions. Due to large rents, full retention is, however, costly for employers. Hence, even when socially inefficient, separation might occur in equilibrium.

Suggested Citation

  • Englmaier, Florian & Muehlheusser, Gerd & Roider, Andreas, 2014. "Optimal incentive contracts for knowledge workers," European Economic Review, Elsevier, vol. 67(C), pages 82-106.
  • Handle: RePEc:eee:eecrev:v:67:y:2014:i:c:p:82-106
    DOI: 10.1016/j.euroecorev.2014.01.006
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    References listed on IDEAS

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    Cited by:

    1. Ramona Diana LEON, 2015. "The Future Knowledge Worker: An Intercultural Perspective," Management Dynamics in the Knowledge Economy Journal, College of Management, National University of Political Studies and Public Administration, vol. 3(4), pages 675-691, December.

    More about this item

    Keywords

    Knowledge workers; Moral hazard; Limited commitment; Ex post outside option;

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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