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Uncertainty, Pay for Performance, and Asymmetric Information

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  • Felipe Balmaceda

Abstract

This article develops a new rationale for the emergence of pay-for-performance contracts where the labor market is competitive, workers are risk averse, and firms are risk neutral and unaware of workers' productivities. The article shows that the prevalence of pay for performance rises and the pay-for-performance sensitivity falls as environmental uncertainty increases. This empirical regularity is unaccounted for alternative models such as the standard agency model. (JEL D86, L2, M5, J3) The Author 2008. Published by Oxford University Press on behalf of Yale University. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

Suggested Citation

  • Felipe Balmaceda, 2009. "Uncertainty, Pay for Performance, and Asymmetric Information," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 25(2), pages 400-441, October.
    • Handle: RePEc:oup:jleorg:v:25:y:2009:i:2:p:400-441
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    File URL: http://hdl.handle.net/10.1093/jleo/ewn022
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    Citations

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    Cited by:

    1. Felipe Balmaceda, 2020. "Contracting with moral hazard, adverse selection and risk neutrality: when does one size fit all?," International Journal of Game Theory, Springer;Game Theory Society, vol. 49(2), pages 601-637, June.
    2. Oriana Bandiera & Luigi Guiso & Andrea Prat & Raffaella Sadun, 2015. "Matching Firms, Managers, and Incentives," Journal of Labor Economics, University of Chicago Press, vol. 33(3), pages 623-681.
    3. Christian Espinosa & Juan Gorigoitía & Carlos Maquieira, 2012. "Nonlinear behaviour of EMBI index:the case of eastern European countries," Working Papers 37, Facultad de Economía y Empresa, Universidad Diego Portales.
    4. Felipe Balmaceda, 2012. "On the Optimality of One-size-fits-all Contracts: The Limited Liability Case," Documentos de Trabajo 291, Centro de Economía Aplicada, Universidad de Chile.
    5. Xu, Minbo & Yin, Nina & Li, Sanxi, 2019. "Multitask assignments with adverse selection," Economics Letters, Elsevier, vol. 181(C), pages 127-132.
    6. Felipe Balmaceda, 2011. "Job Design and Incentives," Documentos de Trabajo 279, Centro de Economía Aplicada, Universidad de Chile.

    More about this item

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • M5 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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