Bonus Culture: Competitive Pay, Screening, and Multitasking

By Roland Bénabou, Jean Tirole. Journal of Political Economy, 2016

250 citations recorded by the source corpus.

To analyze the impact of labor market competition on the structure of compensation, we embed multitasking and screening within a Hotelling framework. Competition for talent leads to an escalation of performance pay, shifting effort away from long-term investments, risk management, and cooperation. Efficiency losses can exceed those from a single principal, who dulls incentives to extract rents. As competition intensifies, monopsonistic underincentivization of low-skill agents first decreases and then gives way to growing overincentivization of high-skill ones. Aggregate welfare is thus hill-shaped, while inequality tends to rise monotonically. Bonus caps can help restore balance in incentives but may generate other distortions.

Subfields: Economics and Econometrics, Safety Research

View Paper: https://www.semanticscholar.org/paper/c1f2b660f0b34f230d0841cdbf4a5771aa032dbc