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American Economic Journal: Microeconomics: Vol. 4 No. 3 (August 2012)

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

Article 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

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)

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Authors

Maestri, Lucas (Toulouse School of Economics)

JEL Classifications

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

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