Using a formal principal-agent model, I investigate the relation between monetary gift-exchange and incentive pay, while allowing for worker heterogeneity. I assume that some agents care more for their principal when they are convinced that the principal cares for them. Principals can signal their altruism by offering a generous contract, consisting of a base salary and an output-contingent bonus. I find that principals signal their altruism by offering relatively weak incentives and a relatively high expected total compensation, but the latter does not necessarily hold. Furthermore, since some agents do not reciprocate the principal's altruism, the principal may find it optimal to write a contract that simultaneously signals his altruism and screens reciprocal worker types. I show that such a contract is characterised by excessively strong incentives and relatively high expected total compensation.

Additional Metadata
Keywords gift-exchange, incentive contracts, signaling game
JEL Economics of Contract Law (jel D86), Contracts: Specific Human Capital, Matching Models, Efficiency Wage Models, and Internal Labor Markets (jel J41), Compensation and Compensation Methods and Their Effects (stock options, fringe benefits, incentives, family support programs, seniority issues) (jel M52), Labor Contracting Devices: Outsourcing; Franchising; Other (jel M55)
Publisher Tinbergen Institute
Persistent URL hdl.handle.net/1765/17666
Citation
Non, J.A. (2010). Gift-Exchange, Incentives, and Heterogeneous Workers (No. TI 2010-008/2). Discussion paper / Tinbergen Institute. Tinbergen Institute. Retrieved from http://hdl.handle.net/1765/17666