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Managerial accountability for payroll expense and firm-size wage effects

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  • Robertas Zubrickas

Abstract

We argue that job performance appraisal is an agency problem with asymmetric transfer values: an employee is paid in proportion to the rating received from his line manager, who only partially internalizes the resultant payroll cost. This asymmetry in rating valuations is based on evidence that managers are not fully accountable for payroll expense, with the degree of unaccountability increasing in firm size. We develop a nested agency model of economic organization of a firm with unaccountable managers, which in equilibrium obtains the firm-size wage effects - the large-firm wage premium and inverse relationship between firm size and wage dispersion.

Suggested Citation

  • Robertas Zubrickas, 2011. "Managerial accountability for payroll expense and firm-size wage effects," IEW - Working Papers 474, Institute for Empirical Research in Economics - University of Zurich.
  • Handle: RePEc:zur:iewwpx:474
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    File URL: http://www.econ.uzh.ch/static/wp_iew/iewwp474.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Compression of ratings; managerial incentives; soft budget constraint; firm-size wage effects; principal-agent model;

    JEL classification:

    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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