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Title:Implicit vs. explicit incentives : theory and a case study PDF Logo
Authors:Demougin, Dominique M.
Fabel, Oliver
Thomann, Christian
Issue Date:2009
Series/Report no.:CESifo working paper 2645
Abstract:We derive the optimal contract between a principal and a liquidity-constrained agent in a stochastically repeated environment. The contract comprises a court-enforceable explicit bonus rule and an implicit fixed salary promise that must be self-enforcing. Since the agent's rent increases with bonus pay, the principal implements the maximum credible salary promise. Thus, the bonus increases while the salary promise and the agent's effort decrease with a higher probability of premature contract termination. We subject this mechanism to econometric testing using personnel data of an insurance company. The empirical results strongly support our theoretical predictions.
Subjects:implicit contract
explicit bonus pay
premature contract termination
compensation and productivity estimates
JEL:J3
M5
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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