Journal of Political Economy Vol. 124 No. 2 2016
Bonus Culture: Competitive Pay, Screening, and Multitasking
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 high-skill 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.
- DOI
- 10.1086/684853
- Volume
- 124
- Issue
- 2
- Pages
- 305-370
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref