Market-based incentives

Borys Grochulski and Yuzhe Zhang ()

MPRA Paper from University Library of Munich, Germany

Abstract: We study optimal incentives in a principal-agent problem in which the agent's outside option is determined endogenously in a competitive labor market. In equilibrium, strong performance increases the agent's market value. When this value becomes sufficiently high, the threat of the agent's quitting forces the principal to give the agent a raise. The prospect of obtaining this raise gives the agent an incentive to exert effort, which reduces the need for standard incentives, like bonuses. In fact, whenever the agent's option to quit is close to being ``in the money,'' the market-induced incentive completely eliminates the need for standard incentives.

Keywords: Market-based incentive; Career Concerns; Endogenous outside option; Limited commitment; Private information; Wage contract (search for similar items in EconPapers)
JEL-codes: D82 D86 J31 J33 M12 M52 (search for similar items in EconPapers)
Date: 2013-03-25
New Economics Papers: this item is included in nep-cta, nep-hrm, nep-lma and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: MARKET‐BASED INCENTIVES (2017)
Working Paper: Market-based incentives (2013)
Working Paper: Market-based incentives (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:45576

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