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Market Competition and Lower Tier Incentives

  • Bernd Theilen

The relationship between competition and performance-related pay has been analyzed in single-principal-single-agent models. While this approach yields good predictions for managerial pay schemes, the predictions fail to apply for employees at lower tiers of a firm’s hierarchy. In this paper, a principal-multi-agent model of incentive pay is developed which makes it possible to analyze the effect of changes in the competitiveness of markets on lower tier incentive payment schemes. The results explain why the payment schemes of agentslocated at low and mid tiers are less sensitive to changes in competition when aggregated firm data is used.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2453.

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Date of creation: 2008
Date of revision:
Handle: RePEc:ces:ceswps:_2453
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  1. Schmidt, Klaus M, 1997. "Managerial Incentives and Product Market Competition," Review of Economic Studies, Wiley Blackwell, vol. 64(2), pages 191-213, April.
  2. Itoh, Hideshi, 1992. "Cooperation in Hierarchical Organizations: An Incentive Perspective," Journal of Law, Economics and Organization, Oxford University Press, vol. 8(2), pages 321-45, April.
  3. Mari Paz Espinosa & Inez Macho-Stadler, 2000. "Endogenous Formation of Partnership with Moral Hazard," Econometric Society World Congress 2000 Contributed Papers 0565, Econometric Society.
  4. Vicente Cuñat & Maria Guadalupe, 2005. "How does product market competition shape incentive contracts?," LSE Research Online Documents on Economics 19894, London School of Economics and Political Science, LSE Library.
  5. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-64, April.
  6. Holmstrom, Bengt & Milgrom, Paul, 1994. "The Firm as an Incentive System," American Economic Review, American Economic Association, vol. 84(4), pages 972-91, September.
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  8. Canice Prendergast, 2002. "The Tenuous Trade-off between Risk and Incentives," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1071-1102, October.
  9. repec:oup:restud:v:64:y:1997:i:2:p:191-213 is not listed on IDEAS
  10. Ramakrishnan, Ram T S & Thakor, Anjan V, 1991. "Cooperation versus Competition in Agency," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(2), pages 248-83, Fall.
  11. Che,Y.K. & Yoo,S.W., 1998. "Optimal incentives for teams," Working papers 8, Wisconsin Madison - Social Systems.
  12. Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563 Elsevier.
  13. Beckmann, Martin J., 1977. "Management production functions and the theory of the firm," Journal of Economic Theory, Elsevier, vol. 14(1), pages 1-18, February.
  14. Patrick Bolton & Jose A. Scheinkman & Wei Xiong, 2003. "Executive Compensation and Short-termist Behavior in Speculative Markets," Levine's Working Paper Archive 506439000000000124, David K. Levine.
  15. Vives, Xavier, 2006. "Innovation and competitive pressure," IESE Research Papers D/634, IESE Business School.
  16. Edward P. Lazear, 1996. "Performance Pay and Productivity," NBER Working Papers 5672, National Bureau of Economic Research, Inc.
  17. Kandel, E. & Lazear, E.P., 1990. "Peer Pressure and Partnerships," Papers 90-07, Rochester, Business - Managerial Economics Research Center.
  18. Itoh, Hideshi, 1991. "Incentives to Help in Multi-agent Situations," Econometrica, Econometric Society, vol. 59(3), pages 611-36, May.
  19. Casey Ichniowski & Kathryn Shaw, 2003. "Beyond Incentive Pay: Insiders' Estimates of the Value of Complementary Human Resource Management Practices," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 155-180, Winter.
  20. Macho-Stadler, I. & Perez-Castrillo, J.D., 1991. "Moral Hazard with Several Agents: The Gains From Cooperation," DELTA Working Papers 91-26, DELTA (Ecole normale supérieure).
  21. Baker, George P, 1992. "Incentive Contracts and Performance Measurement," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 598-614, June.
  22. Itoh Hideshi, 1993. "Coalitions, Incentives, and Risk Sharing," Journal of Economic Theory, Elsevier, vol. 60(2), pages 410-427, August.
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