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Bonus Culture: Competitive Pay, Screening and Multitasking

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  • Bénabou, Roland
  • Tirole, Jean

Abstract

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.

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Paper provided by Institute for Advanced Study in Toulouse (IAST) in its series IAST Working Papers with number 12-03.

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Date of creation: Dec 2012
Date of revision: Mar 2013
Handle: RePEc:tse:iastwp:26685
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Find related papers by JEL classification:
  • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
  • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
  • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
  • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
  • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
  • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
  • M - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Inequality's effects
    by chris dillow in Stumbling and Mumbling on 2013-01-22 14:21:04
  2. Socialism, institutions & human nature
    by chris dillow in Stumbling and Mumbling on 2013-01-28 14:39:57
  3. The Cold War isn't over
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Cited by:

  1. Tymula, Agnieszka, 2013. "Competitive Screening of a Heterogeneous Labor Force and Corporate Teamwork Attitude," Working Papers 2013-18, University of Sydney, School of Economics.
  2. F. Barigozzi & N. Burani, 2014. "Competition and Screening with Skilled and Motivated Workers," Working Papers wp953, Dipartimento Scienze Economiche, Universita' di Bologna.
  3. Viral V. Acharya & Marco Pagano & Paolo Volpin, 2013. "Seeking Alpha: Excess Risk Taking and Competition for Managerial Talent," NBER Working Papers 18891, National Bureau of Economic Research, Inc.
  4. Herbold, Daniel, 2014. "A repeated principal-agent model with on-the-job search," SAFE Working Paper Series 64, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
  5. John Thanassoulis, 2012. "Bank Pay Caps, Bank Risk, and Macroprudential Regulation," Economics Series Working Papers 636, University of Oxford, Department of Economics.
  6. Bannier, Christina E. & Feess, Eberhard & Packham, Natalie, 2014. "Incentive schemes, private information and the double-edged role of competition for agents," CFS Working Paper Series 475, Center for Financial Studies (CFS).
  7. Gill, Andrej & Heinz, Matthias & Schumacher, Heiner, 2014. "Trust, trustworthiness and selection into the financial industry," CFS Working Paper Series 458, Center for Financial Studies (CFS).

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