Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/30549
Authors: 
Demougin, Dominique M.
Fabel, Oliver
Thomann, Christian
Year of Publication: 
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

Files in This Item:
File
Size
806.71 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.