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Pareto Gains from Limiting Compensation Options

Author

Listed:
  • Pal Debashis

    (Department of Economics, University of Cincinnati, 2906 Woodside Drive Cincinnati, Ohio 45221 USA)

  • Sappington David E. M.

    (Department of Economics, University of Florida, PO Box 117140, Gainesville, FL 32611 USA)

  • Topolyan Iryna

    (Department of Economics, University of Cincinnati, 2906 Woodside Drive Cincinnati, Ohio 45221 USA)

Abstract

We examine the effects of a single payment structure policy (SPP) that prevents an employer from offering an employee a choice among compensation structures. An SPP reduces the employer's profit and increases the employee's welfare when the employee's (privately known) ability is exogenous. In contrast, an SPP can increase both the employer's profit and the employee's welfare when the employee's ability is endogenous. An SPP secures these Pareto gains by restricting the employer's ability to limit the rent the employee earns from high ability, thereby inducing the employee to increase his human capital investment.

Suggested Citation

  • Pal Debashis & Sappington David E. M. & Topolyan Iryna, 2022. "Pareto Gains from Limiting Compensation Options," IZA Journal of Labor Economics, Sciendo & Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 12(1), pages 1-29, January.
    • Handle: RePEc:vrs:izajle:v:12:y:2022:i:1:p:29:n:3
    DOI: 10.2478/izajole-2023-0002
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law

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