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The rise of individual performance pay

  • Kvaløy, Ola


    (University of Stavanger)

  • Olsen, Trond

    (Norwegian School of Economics and Business Administration)

Why does individual performance pay seem to prevail in human capital intensive industries? We present a model that may explain this. In a repeated game model of relational contracting, we analyze the conditions for implementing peer dependent incentive regimes when agents possess indispensable human capital. We show that the larger the share of values that the agents can hold-up, the lower is the implementable degree of peer dependent incentives. In a setting with team effects — complementary tasks and peer pressure, respectively — we show that while team-based incentives are optimal if agents are dispensable, it may be costly, and in fact suboptimal, to provide team incentives once the agents become indispensable.

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Paper provided by University of Stavanger in its series UiS Working Papers in Economics and Finance with number 2009/3.

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Length: 33 pages
Date of creation: 15 Dec 2008
Date of revision:
Handle: RePEc:hhs:stavef:2009_003
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University of Stavanger, NO-4036 Stavanger, Norway

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