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  3. American Economic Journal: Microeconomics
  4. August 2012
  5. Bonus Payments versus Efficiency Wages in the Repeated Principal-Agent Model with Subjective Evaluations

American Economic Journal:
Microeconomics

ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)

Bonus Payments versus Efficiency Wages in the Repeated Principal-Agent Model with Subjective Evaluations

  • Lucas Maestri
American Economic Journal: Microeconomics
vol. 4, no. 3, August 2012
(pp. 34–56)
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Abstract

We study an infinitely repeated principal-agent model with subjective evaluations. We compare the surplus in efficiency-wage equilibria and in bonus-payments equilibria. The agent receives a constant wage and is motivated by the threat of dismissal in efficiency-wage equilibria. The agent receives a bonus and quits the relationship after disagreements between his self-evaluation and the principal's performance appraisal in bonus-payments equilibria. We construct a class of equilibria with bonus payments that approach efficiency as patience increases. In contrast, payoffs from efficiency-wage equilibria are bounded away from the Pareto-payoff frontier for any discount factor. (JEL D82, J33, J41)

Citation

Maestri, Lucas. 2012. "Bonus Payments versus Efficiency Wages in the Repeated Principal-Agent Model with Subjective Evaluations." American Economic Journal: Microeconomics, 4 (3): 34–56. DOI: 10.1257/mic.4.3.34

JEL Classification

  • D82 Asymmetric and Private Information
  • J33 Compensation Packages; Payment Methods
  • J41 Labor Contracts
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