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)
"Bonus Payments versus Efficiency Wages in the Repeated Principal-Agent Model with Subjective Evaluations."
American Economic Journal: Microeconomics,
Asymmetric and Private Information
Compensation Packages; Payment Methods