Bonus culture: Competitive pay, screening, and multitasking

Roland Bénabou, Jean Tirole

Research output: Contribution to journalArticlepeer-review

57 Scopus citations

Abstract

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 highskill 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.

Original languageEnglish (US)
Pages (from-to)305-370
Number of pages66
JournalJournal of Political Economy
Volume124
Issue number2
DOIs
StatePublished - Apr 2016

ASJC Scopus subject areas

  • Economics and Econometrics

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