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Commitment and optimal incentive

Author

Listed:
  • Liu, Taoxiong
  • Zhou, Bihua

Abstract

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.

Suggested Citation

  • Liu, Taoxiong & Zhou, Bihua, 2011. "Commitment and optimal incentive," MPRA Paper 35550, University Library of Munich, Germany, revised 20 Dec 2011.
  • Handle: RePEc:pra:mprapa:35550
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    File URL: https://mpra.ub.uni-muenchen.de/35550/2/MPRA_paper_35550.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Commitment; Organizational support; Optimal Incentive; Contract;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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