Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/108094
Authors: 
Frederiksen, Anders
Takáts, Elîod
Year of Publication: 
2004
Series/Report no.: 
IEHAS Discussion Papers MT-DP - 2004/18
Abstract: 
Firms use a rich set of incentives including fixed wages, bonuses, threat of firing and promise of promotion. Yet, we do not have a theoretical understanding of how such a mix of incentives can arise. This paper aims to build a theoretical model which describes the incentive mix as the solution to an optimal contracting problem and provides broader testable implications. The basic model has a principal-agent relationship with unobservable effort. The integrative model includes the basic model and three building blocks: job-assignment, learning and human capital. The derived incentive mix is a consequence of the dual role of firing. It is both an incentive and a sorting decive. The model's predictions are tested on firm-level data from a large pharmaceutical company. The broader testable implications beyond the incentive mix are also confirmed by the data.
ISBN: 
9639588199
Document Type: 
Working Paper

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