IDEAS home Printed from https://ideas.repec.org/a/eee/irlaec/v29y2009i4p349-359.html
   My bibliography  Save this article

Annullable bonuses and penalties

Author

Listed:
  • De Geest, Gerrit
  • Dari-Mattiacci, Giuseppe
  • Siegers, Jacques J.

Abstract

An annullable penalty is a sanction that is applied unless monitoring takes place and the agent is found non-shirking. An annullable bonus is a bonus that the agent receives unless he has been monitored and found shirking. Annullable penalties and bonuses stand in contrast with normal penalties and bonuses, which are only applied if monitoring has taken place. While real-life examples of annullable penalties are rare (an example is a sanction for which the burden of proof is reversed), there is a clear and oft-discussed example of annullable bonuses: efficiency wages. Under efficiency wages all employees receive a bonus (an overpayment), except for those who have been monitored and found shirking. This paper analyzes under what conditions annullable bonuses or penalties make economic sense. On the one hand, annullable bonuses and penalties have a degree of ineffectiveness that is absent in their normal counterparts: the penalty paid by or the bonus paid to non-monitored agents does not improve their incentives. Not only does this ineffective part make the expected sanction or bonus higher than necessary but it also creates an implicit tax on low monitoring levels and hence distorts monitoring choices. On the other hand, the annullable variants may change the ex post incentives of the agents (to come up with evidence) and the principal (to monitor as promised). As a result, annullable bonuses (such as efficiency wages) can be rational choices when the principal cannot credibly commit to paying bonuses with a certain probability, and annullable penalties can make sense when the agent needs an incentive to reveal information.

Suggested Citation

  • De Geest, Gerrit & Dari-Mattiacci, Giuseppe & Siegers, Jacques J., 2009. "Annullable bonuses and penalties," International Review of Law and Economics, Elsevier, vol. 29(4), pages 349-359, December.
  • Handle: RePEc:eee:irlaec:v:29:y:2009:i:4:p:349-359
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0144-8188(09)00027-1
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Boadway, Robin & Marceau, Nicolas & Marchand, Maurice, 1996. "Time-Consistent Criminal Sanctions," Public Finance = Finances publiques, , vol. 51(2), pages 149-165.
    2. A. Mitchell Polinsky & Yeon-Koo Che, 1991. "Decoupling Liability: Optimal Incentives for Care and Litigation," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 562-570, Winter.
    3. Gary S. Becker & George J. Stigler, 1974. "Law Enforcement, Malfeasance, and Compensation of Enforcers," The Journal of Legal Studies, University of Chicago Press, vol. 3(1), pages 1-18, January.
    4. Henrik Lando, 2006. "Does Wrongful Conviction Lower Deterrence?," The Journal of Legal Studies, University of Chicago Press, vol. 35(2), pages 327-337, June.
    5. Matthew Baker & Thomas Miceli, 2005. "Credible Criminal Enforcement," European Journal of Law and Economics, Springer, vol. 20(1), pages 5-15, July.
    6. Shavell, Steven, 1997. "The optimal level of corporate liability given the limited ability of corporations to penalize their employees," International Review of Law and Economics, Elsevier, vol. 17(2), pages 203-213, June.
    7. Akerlof, George A, 1984. "Gift Exchange and Efficiency-Wage Theory: Four Views," American Economic Review, American Economic Association, vol. 74(2), pages 79-83, May.
    8. George A. Akerlof, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, Oxford University Press, vol. 97(4), pages 543-569.
    9. Cooter, Robert & Garoupa, Nuno, 2000. "The Virtuous Circle of Distrust: A Mechanism to Deter Bribes and Other Cooperative Crimes," Berkeley Olin Program in Law & Economics, Working Paper Series qt83c0k3wc, Berkeley Olin Program in Law & Economics.
    10. Giuseppe Dari‐Mattiacci & Barbara M. Mangan, 2008. "Disappearing Defendants versus Judgment‐Proof Injurers," Economica, London School of Economics and Political Science, vol. 75(300), pages 749-765, November.
    11. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Søren Rud Kristensen, 2017. "Financial Penalties for Performance in Health Care," Health Economics, John Wiley & Sons, Ltd., vol. 26(2), pages 143-148, February.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. G.G.A. de Geest & G. Dari Mattiacci & J.J. Siegers, 2004. "The Intrinsic Inferiority of Efficiency Wages to Damages and Conditional Bonuses," Working Papers 04-15, Utrecht School of Economics.
    2. Tetteh, Rebecca & Mohammed, Safura & Ahmed Azumah, Ayisha, 2017. "What is the effect of wages and supervision on productivity? The perspective of Sunyani Technical University staff," MPRA Paper 81473, University Library of Munich, Germany.
    3. Gillan, Stuart L. & Nguyen, Nga Q., 2016. "Incentives, termination payments, and CEO contracting," Journal of Corporate Finance, Elsevier, vol. 41(C), pages 445-465.
    4. Nicolas Jacquemet, 2005. "La corruption comme une imbrication de contrats : Une revue de la littérature microéconomique," Working Papers 2005-29, Center for Research in Economics and Statistics.
    5. William T. Dickens & Lawrence F. Katz & Kevin Lang & Lawrence H. Summers, 1987. "Employee Crime, Monitoring, and the Efficiency Wage Hypothesis," NBER Working Papers 2356, National Bureau of Economic Research, Inc.
    6. Zapf, Ines, 2015. "Individual and workplace-specific determinants of paid and unpaid overtime work in Germany," IAB Discussion Paper 201515, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
    7. Akwasi Ampofo & Firmin Doko Tchatoka, 2019. "Reducing Public‐Private Sector Pay Differentials: The Single Spine Pay Policy As A Natural Experiment In Ghana," Economic Inquiry, Western Economic Association International, vol. 57(1), pages 283-315, January.
    8. Driscoll, John C. & Holden, Steinar, 2014. "Behavioral economics and macroeconomic models," Journal of Macroeconomics, Elsevier, vol. 41(C), pages 133-147.
    9. Jinpeng MA, 2009. "Jobless Recovery, Idle Productivity, and the Role of Capital," EcoMod2009 21500060, EcoMod.
    10. Bhattacharyya, Chandril & Gupta, Manash Ranjan, 2020. "Union, Efficiency of Labour and Endogenous Growth," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 61(2), pages 170-202, December.
    11. Katarzyna Budnik, 2012. "Do those who stay work less? On the impact of emigration on the measured TFP in Poland," NBP Working Papers 113, Narodowy Bank Polski, Economic Research Department.
    12. Ahmad Jafari Samimi, 2011. "Efficiency Wage Hypothesis: The Case Study of Iran's Manufacturing Industries," Journal of Social and Development Sciences, AMH International, vol. 1(5), pages 157-164.
    13. Laura Policardo & Lionello F. Punzo & Edgar J. Sanchez Carrera, 2019. "On the wage–productivity causal relationship," Empirical Economics, Springer, vol. 57(1), pages 329-343, July.
    14. Hélène Zajdela, 1990. "Le dualisme du marché du travail : enjeux et fondements théoriques," Économie et Prévision, Programme National Persée, vol. 92(1), pages 31-42.
    15. Bhalotra, Sonia, 1998. "Investigating rationality in wage-setting," LSE Research Online Documents on Economics 6682, London School of Economics and Political Science, LSE Library.
    16. Campbell, Carl III, 1995. "A cross-industry time-series analysis of quits," The Quarterly Review of Economics and Finance, Elsevier, vol. 35(1), pages 53-72.
    17. Bruno De Borger & Amihai Glazer, 2015. "Inducing political action by workers," Southern Economic Journal, John Wiley & Sons, vol. 81(4), pages 1117-1144, April.
    18. Cecilia Navarra & Ermanno Tortia, 2014. "Employer Moral Hazard, Wage Rigidity, and Worker Cooperatives: A Theoretical Appraisal," Journal of Economic Issues, Taylor & Francis Journals, vol. 48(3), pages 707-726.
    19. Clara Xiaoling Chen & Tatiana Sandino, 2012. "Can Wages Buy Honesty? The Relationship Between Relative Wages and Employee Theft," Journal of Accounting Research, Wiley Blackwell, vol. 50(4), pages 967-1000, September.
    20. Cahill, Miles B., 2000. "Exploring the interaction between efficiency wages and labor market frictions," The Quarterly Review of Economics and Finance, Elsevier, vol. 40(1), pages 121-137.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:irlaec:v:29:y:2009:i:4:p:349-359. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Haili He). General contact details of provider: http://www.elsevier.com/locate/irle .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.