Bonus Culture: Competitive Pay, Screening, and Multitasking
59 Pages Posted: 5 Jul 2014
There are 4 versions of this paper
Bonus Culture: Competitive Pay, Screening, and Multitasking
Bonus Culture: Competitive Pay, Screening, and Multitasking
Bonus Culture: Competitive Pay, Screening, and Multitasking
Bonus Culture: Competitive Pay, Screening, and Multitasking
Date Written: May 1, 2014
Abstract
This paper analyzes the impact of labor market competition 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-fi rm 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 in earnings and utility 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.
Keywords: incentives, performance pay, bonuses, executive compensation, inequality, multitask contracts, screening, adverse selection, moral hazard, work ethic, Hotelling, competition
JEL Classification: D31, D82, D86, J31, J33, L13, M12
Suggested Citation: Suggested Citation
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