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Bonus Culture: Competitive Pay, Screening, and Multitasking

Listed author(s):
  • Roland Bénabou
  • Jean Tirole

To analyze the impact of labor market competition on the structure of compensation, we embed multitasking and screening within a Hotelling framework. Competition for talent leads to an escalation of performance pay, shifting effort away from long-term investments, risk management, and cooperation. Efficiency losses can exceed those from a single principal, who dulls incentives to extract rents. As competition intensifies, monopsonistic underincentivization of low-skill agents first decreases and then gives way to growing overincentivization of high-skill ones. Aggregate welfare is thus hill-shaped, while inequality tends to rise monotonically. Bonus caps can help restore balance in incentives but may generate other distortions.

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File URL: http://dx.doi.org/10.1086/684853
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File URL: http://dx.doi.org/10.1086/684853
Download Restriction: Access to the online full text or PDF requires a subscription.

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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 124 (2016)
Issue (Month): 2 ()
Pages: 305-370

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Handle: RePEc:ucp:jpolec:doi:10.1086/684853
Contact details of provider: Web page: http://www.journals.uchicago.edu/JPE/

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