IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Bonus Culture: Competitive Pay, Screening, and Multitasking

  • Benabou, Roland

    ()

    (Princeton University)

  • Tirole, Jean

    ()

    (IDEI)

This paper analyzes the impact of labor market competition and skill-biased technical change on the structure of compensation. The model combines multitasking and screening, embedded into a Hotelling-like framework. Competition for the most talented workers leads to an escalating reliance on performance pay and other high-powered incentives, thereby shifting effort away from less easily contractible tasks such as long-term investments, risk management and within-firm cooperation. Under perfect competition, the resulting efficiency loss can be much larger than that imposed by a single firm or principal, who distorts incentives downward in order to extract rents. More generally, as declining market frictions lead employers to compete more aggressively, the monopsonistic underincentivization of low-skill agents first decreases, then gives way to a growing overincentivization of high-skill ones. Aggregate welfare is thus hill-shaped with respect to the competitiveness of the labor market, while inequality tends to rise monotonically. Bonus caps and income taxes can help restore balance in agents' incentives and behavior, but may generate their own set of distortions.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://ftp.iza.org/dp7321.pdf
Download Restriction: no

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7321.

as
in new window

Length: 59 pages
Date of creation: Mar 2013
Date of revision:
Handle: RePEc:iza:izadps:dp7321
Contact details of provider: Postal: IZA, P.O. Box 7240, D-53072 Bonn, Germany
Phone: +49 228 3894 223
Fax: +49 228 3894 180
Web page: http://www.iza.org

Order Information: Postal: IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany
Email:


References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Bénabou, Roland & Tirole, Jean, 2011. "Laws and Norms," CEPR Discussion Papers 8663, C.E.P.R. Discussion Papers.
  2. Xavier Gabaix & Augustin Landier, 2006. "Why Has CEO Pay Increased So Much?," 2006 Meeting Papers 518, Society for Economic Dynamics.
  3. Vicente Cuñat & Maria Guadalupe, 2009. "Globalization and the provision of incentives inside the firm: The effect of foreign competition," Economics Working Papers 1134, Department of Economics and Business, Universitat Pompeu Fabra.
  4. Thomas Philippon & Ariell Reshef, 2009. "Wages and Human Capital in the U.S. Financial Industry: 1909-2006," NBER Working Papers 14644, National Bureau of Economic Research, Inc.
  5. Fehr, Ernst & Schmidt, Klaus M., 2004. "Fairness and incentives in a multi-task principal-agent model," Munich Reprints in Economics 20657, University of Munich, Department of Economics.
  6. Fabbri, Francesca & Marin, Dalia, 2012. "What Explains the Rise in CEO Pay in Germany? A Panel Data Analysis for 1977-2009," CEPR Discussion Papers 8879, C.E.P.R. Discussion Papers.
  7. Benjamin E. Hermalin, 2005. "Trends in Corporate Governance," Journal of Finance, American Finance Association, vol. 60(5), pages 2351-2384, October.
  8. Timothy Besley & Maitreesh Ghatak, 2011. "Taxation and Regulation of Bonus Pay," STICERD - Economic Organisation and Public Policy Discussion Papers Series 030, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  9. Tymula, Agnieszka, 2013. "Competitive Screening of a Heterogeneous Labor Force and Corporate Teamwork Attitude," Working Papers 2013-18, University of Sydney, School of Economics.
  10. George A. Akerlof & Rachel E. Kranton, 2005. "Identity and the Economics of Organizations," Journal of Economic Perspectives, American Economic Association, vol. 19(1), pages 9-32, Winter.
  11. Patrick Bolton & Jose Scheinkman & Wei Xiong, 2003. "Executive Compensation and Short-termist Behavior in Speculative Markets," NBER Working Papers 9722, National Bureau of Economic Research, Inc.
  12. Michael Kosfeld & Ferdinand von Siemens, 2007. "Competition, Cooperation, and Corporate Culture," IEW - Working Papers 328, Institute for Empirical Research in Economics - University of Zurich.
  13. Nick Netzer & Florian Scheuer, 2010. "Competitive Markets without Commitment," Journal of Political Economy, University of Chicago Press, vol. 118(6), pages 1079 - 1109.
  14. Nicholas Bloom & John Van Reenen, 2010. "Human Resource Management and Productivity," CEP Discussion Papers dp0982, Centre for Economic Performance, LSE.
  15. J. Miguel Villas-Boas & Udo Schmidt-Mohr, 1999. "Oligopoly with Asymmetric Information: Differentiation in Credit Markets," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 375-396, Autumn.
  16. Brian Bell & John Van Reenen, 2013. "Bankers and their bonuses," CEP Occasional Papers 35, Centre for Economic Performance, LSE.
  17. Schmidt, Klaus M., 1997. "Managerial Incentives and Product Market Competition," Munich Reprints in Economics 19772, University of Munich, Department of Economics.
  18. Brekke, Kjell Arne & Nyborg, Karine, 2008. "Attracting responsible employees: Green production as labor market screening," Resource and Energy Economics, Elsevier, vol. 30(4), pages 509-526, December.
  19. Karuna, Christo, 2007. "Industry product market competition and managerial incentives," Journal of Accounting and Economics, Elsevier, vol. 43(2-3), pages 275-297, July.
  20. Carola Frydman & Raven E. Saks, 2008. "Executive Compensation: A New View from a Long-Term Perspective, 1936-2005," NBER Working Papers 14145, National Bureau of Economic Research, Inc.
  21. John Thanassoulis, 2013. "Industry Structure, Executive Pay, and Short-Termism," Management Science, INFORMS, vol. 59(2), pages 402-419, June.
  22. Itoh, Hideshi, 1991. "Incentives to Help in Multi-agent Situations," Econometrica, Econometric Society, vol. 59(3), pages 611-36, May.
  23. Jean Tirole & Jean-Jaques Laffont, 1985. "Using Cost Observation to Regulate Firms," Working papers 368, Massachusetts Institute of Technology (MIT), Department of Economics.
  24. Steven N. Kaplan & Joshua Rauh, 2010. "Wall Street and Main Street: What Contributes to the Rise in the Highest Incomes?," Review of Financial Studies, Society for Financial Studies, vol. 23(3), pages 1004-1050, March.
  25. Viral Acharya & Marco Pagano & Paolo Volpin, 2012. "Seeking Alpha: Excess Risk Taking and Competition for Managerial Talent," CSEF Working Papers 312, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 10 Apr 2015.
  26. Armstrong, Mark & Vickers, John, 2001. "Competitive Price Discrimination," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 579-605, Winter.
  27. Moen, Espen R. & Rosén, Åsa, 2001. "Performance pay and adverse selection," Working Paper Series 2/2001, Swedish Institute for Social Research.
  28. Edward P. Lazear, 2000. "Performance Pay and Productivity," American Economic Review, American Economic Association, vol. 90(5), pages 1346-1361, December.
  29. Thomas Piketty & Emmanuel Saez & Stefanie Stantcheva, 2014. "Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities," American Economic Journal: Economic Policy, American Economic Association, vol. 6(1), pages 230-71, February.
  30. Bandiera, Oriana & Barankay, Iwan & Rasul, Imran, 2006. "Incentives for Managers and Inequality Among Workers: Evidence from a Firm Level Experiment," CEPR Discussion Papers 5649, C.E.P.R. Discussion Papers.
  31. Prendergast, Canice, 1992. "Career development and specific human capital collection," Journal of the Japanese and International Economies, Elsevier, vol. 6(3), pages 207-227, September.
  32. María Guadalupe, 2005. "Product Market Competition Returns to Skill and Wage Inequality," CEP Discussion Papers dp0686, Centre for Economic Performance, LSE.
  33. Marin, Dalia & Verdier, Thierry, 2003. "Globalization and the Empowerment of Talent," Discussion Papers in Economics 268, University of Munich, Department of Economics.
  34. Stewart, Jay, 1994. "The Welfare Implications of Moral Hazard and Adverse Selection in Competitive Insurance Markets," Economic Inquiry, Western Economic Association International, vol. 32(2), pages 193-208, April.
  35. Canice Prendergast, 2007. "The Motivation and Bias of Bureaucrats," American Economic Review, American Economic Association, vol. 97(1), pages 180-196, March.
  36. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
  37. Timothy Besley & Maitreesh Ghatak, 2006. "Sorting with Motivated Agents: Implications for School Competition and Teacher Incentives," Journal of the European Economic Association, MIT Press, vol. 4(2-3), pages 404-414, 04-05.
  38. George Baker & Robert Gibbons & Kevin J. Murphy, 1993. "Subjective Performance Measures in Optimal Incentive Contracts," NBER Working Papers 4480, National Bureau of Economic Research, Inc.
  39. Chassagnon, A. & Chiappori, P.A., 1994. "Insurance Under Moral Hazard and Adverse Selection: The Case of Pure Competition," Papers 28, Laval - Laboratoire Econometrie.
  40. Veronica Guerrieri & Robert Shimer & Randall Wright, 2009. "Adverse Selection in Competitive Search Equilibrium," NBER Working Papers 14915, National Bureau of Economic Research, Inc.
  41. Bruce Shearer, 2004. "Piece Rates, Fixed Wages and Incentives: Evidence from a Field Experiment," Review of Economic Studies, Wiley Blackwell, vol. 71(2), pages 513-534, 04.
  42. Baker, George P, 1992. "Incentive Contracts and Performance Measurement," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 598-614, June.
  43. Abhijit Ramalingam & Michael T. Rauh, 2010. "The Firm as a Socialization Device," Management Science, INFORMS, vol. 56(12), pages 2191-2206, December.
  44. Marianne Bertrand & Sendhil Mullainathan, 2001. "Are Ceos Rewarded For Luck? The Ones Without Principals Are," The Quarterly Journal of Economics, MIT Press, vol. 116(3), pages 901-932, August.
  45. Cuñat, Vicente & Guadalupe, Maria, 2004. "Executive Compensation and Competition in the Banking and Financial Sectors," IZA Discussion Papers 1123, Institute for the Study of Labor (IZA).
  46. Maskin, Eric & Tirole, Jean, 1992. "The Principal-Agent Relationship with an Informed Principal, II: Common Values," Econometrica, Econometric Society, vol. 60(1), pages 1-42, January.
  47. Jean-Charles Rochet & Lars A. Stole, 2002. "Nonlinear Pricing with Random Participation," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 277-311.
  48. Rosen, Sherwin, 1981. "The Economics of Superstars," American Economic Review, American Economic Association, vol. 71(5), pages 845-58, December.
  49. Bruce Shearer, 2004. "Piece Rates, Fixed Wages and Incentives: Evidence from a Field Experiment," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 513-534.
  50. Baumol, William J, 1990. "Entrepreneurship: Productive, Unproductive, and Destructive," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 893-921, October.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:iza:izadps:dp7321. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Fallak)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.