Gift-Exchange, Incentives, and Heterogeneous Workers
2010-01-05
Research Paper
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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.
- M52 : Compensation and Compensation Methods and Their Effects (stock options, fringe benefits, incentives, family support programs, seniority issues)
- D86 : Economics of Contract Law
- J41 : Contracts: Specific Human Capital, Matching Models, Efficiency Wage Models, and Internal Labor Markets
- M55 : Labor Contracting Devices: Outsourcing; Franchising; Other
- worker
- incentive
- sel...sh
- contract
- equilibrium
- altruism
- bonus
- utility
- base salary
- relation
- screening
- gift-exchange
- model
- sel...sh worker
- salary
- increase
- worker types
- icc 1
- compensation
- signal
