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Commitment and optimal incentive

  • Liu, Taoxiong
  • Zhou, Bihua

We propose an extended principal-agent model considering employee commitment and describe how to motivate committed agent, who not only shows regard for his own income but also cares the organizational benefit. The principal also would like to provide support to such an agent and his utility depends on both the final profit and the payoff to the agent. There are some interesting insights into the characteristic of optimal contracts: First, commitment is an effective motivator and committed employee needs less monetary inducement to perform his job well than one who not. More specifically, undifferentiated pay is sufficient in incentivizing committed agent to implement high effort in some cases. Second, commitment and wage differential are substitutable to each other in the optimal incentive compensation design. Third, commitment is not always good for organizational efficiency when the increase in employee commitment relies on the principal’s support. Our model's finding is consistent with employee incentive in some organizations, and also help to incentive mechanism design under wages differential constraints and understanding excessive compensation.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 35550.

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Date of creation: 08 Dec 2011
Date of revision: 20 Dec 2011
Handle: RePEc:pra:mprapa:35550
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  1. Edward P. Lazear, 1991. "Labor Economics and the Psychology of Organizations," Journal of Economic Perspectives, American Economic Association, vol. 5(2), pages 89-110, Spring.
  2. Leete, Laura, 2001. "Whither the Nonprofit Wage Differential? Estimates from the 1990 Census," Journal of Labor Economics, University of Chicago Press, vol. 19(1), pages 136-70, January.
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  10. James Andreoni & John Miller, 2002. "Giving According to GARP: An Experimental Test of the Consistency of Preferences for Altruism," Econometrica, Econometric Society, vol. 70(2), pages 737-753, March.
  11. Sugden, Robert, 1984. "Reciprocity: The Supply of Public Goods through Voluntary Contributions," Economic Journal, Royal Economic Society, vol. 94(376), pages 772-87, December.
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  13. Canice Prendergast, 2007. "The Motivation and Bias of Bureaucrats," American Economic Review, American Economic Association, vol. 97(1), pages 180-196, March.
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  16. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
  17. Rachel T. A. Croson, 2007. "Theories Of Commitment, Altruism And Reciprocity: Evidence From Linear Public Goods Games," Economic Inquiry, Western Economic Association International, vol. 45(2), pages 199-216, 04.
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