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Differentiation and Risk Aversion in Imperfectly Competitive Labor Markets

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  • Christina E. Bannier
  • Eberhard Feess
  • Natalie Packham
  • Markus Walzl

Abstract

We examine the effect of imperfect labor market competition on the efficiency of compensation schemes in a setting with moral hazard and risk-averse agents who have private information on their ability. Two heterogeneous firms compete for agents by offering contracts with fixed and variable payments. When competition is low, low-ability agents are underincentivized, exerting too little effort. When competition is high, high-ability agents are overincentivized and bear too much risk. For intermediate competition, contracts are second-best. An equilibrium where both firms are active exists only when the least-cost separating allocation is interim efficient.

Suggested Citation

  • Christina E. Bannier & Eberhard Feess & Natalie Packham & Markus Walzl, 2021. "Differentiation and Risk Aversion in Imperfectly Competitive Labor Markets," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 177(1), pages 1-27.
    • Handle: RePEc:mhr:jinste:urn:doi:10.1628/jite-2020-0044
    DOI: 10.1628/jite-2020-0044
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    More about this item

    Keywords

    incentive compensation; screening; imperfect labor market competition; vertical differentiation; horizontal differentiation; risk aversion;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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