Title

Bonus Culture: Competitive Pay, Screening, and Multitasking

Author(s)

Roland Benabou Roland Benabou (Princeton University)

Jean Tirole Jean Tirole (Toulouse School of Economics and IAST)

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-firm 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 under incentivization of low-skill agents first decreases, then gives way to a growing over incentivization 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.

Creation Date

2014-05

Section URL ID

Paper Number

066_201 4

URL

http://detc.princeton.edu/wp-content/uploads/2016/11/wp066_2014_Benabou_Tirole_Bonus-Culture.pdf

File Function

Jel

D31, D82, D86, J31, J33, L13, M12

Keyword(s)

incentives, performance pay, bonuses, executive compensation, inequality, multitask, contracts, screening, adverse selection, moral hazard, work ethic, Hotelling, competition

Suppress

false

Series

10