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ifo Institut – Leibniz-Institut für Wirtschaftsforschung an der Universität München >
CESifo Working Papers, CESifo Group Munich >
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http://hdl.handle.net/10419/30549
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| Title: | | Implicit vs. explicit incentives : theory and a case study  |
| 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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