Annullable bonuses and penalties
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.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- George A. Akerlof, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, Oxford University Press, vol. 97(4), pages 543-569.
- 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.
- A. Mitchell Polinsky & Yeon-Koo Che, 1991.
"Decoupling Liability: Optimal Incentives for Care and Litigation,"
NBER Working Papers
3634, National Bureau of Economic Research, Inc.
- 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.
- Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
- Matthew Baker & Thomas Miceli, 2005.
"Credible Criminal Enforcement,"
European Journal of Law and Economics,
Springer, vol. 20(1), pages 5-15, July.
- Robin W. Boadway & Nicolas Marceau, 1993.
"Time-Consistent Criminal Sanctions,"
883, Queen's University, Department of Economics.
- Boadway, R. & Marceau, N. & Marchand, M., 1993. "Time-Consistent Criminal Sanctions," Papers 9318, Laval - Recherche en Politique Economique.
- BOADWAY, Robin & MARCEAU, Nicolas & MARCHAND, Maurice, . "Time-consistent criminal sanctions," CORE Discussion Papers RP 1337, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- BOADWAY, Robin & MARCEAU, Nicolas & MARCHAND, Maurice, 1994. "Time-Consistent Criminal Sanctions," CORE Discussion Papers 1994010, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Henrik Lando, 2006. "Does Wrongful Conviction Lower Deterrence?," The Journal of Legal Studies, University of Chicago Press, vol. 35(2), pages 327-337, 06.
- 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.
- 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.
- 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.
- 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.
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: (Zhang, Lei)
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 references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link 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 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.