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American Economic Journal: Microeconomics: Vol. 4 No. 2 (May 2012)

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Contractual and Organizational Structure with Reciprocal Agents

Article Citation

Englmaier, Florian, and Stephen Leider. 2012. "Contractual and Organizational Structure with Reciprocal Agents." American Economic Journal: Microeconomics, 4(2): 146-83.

DOI: 10.1257/mic.4.2.146

Abstract

We solve for the optimal contract when agents are reciprocal, demonstrating that generous compensation can substitute for performance-based pay. Our results suggest several factors that make firms more likely to use reciprocal incentives. Reciprocity is most powerful when output is a poor signal of effort and when the agent is highly reciprocal and/or productive. Similarly, reciprocal incentives are attractive when firm managers have strong incentive pay and discretion over employee compensation. While reciprocal incentives can be optimal even when identical firms compete, a reciprocity contract is most likely when one firm has a match-specific productivity advantage with the agent. (JEL D23, D86, J33, M12, M52)

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Authors

Englmaier, Florian (U Konstanz)
Leider, Stephen (U MI)

JEL Classifications

D23: Organizational Behavior; Transaction Costs; Property Rights
D86: Economics of Contract: Theory
J33: Compensation Packages; Payment Methods
M12: Personnel Management; Executive Compensation
M52: Personnel Economics: Compensation and Compensation Methods and Their Effects

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