Working Paper: CEPR ID: DP4511
Authors: Espen R. Moen; S. A. Rosn
Abstract: It is well known in personnel economics that firms may improve the quality of their workforce by offering performance pay. We analyse an equilibrium model where worker productivity is private information and show that the gains to the firms from worker self-selection may not be matched by a corresponding social gain. In particular, the equilibrium incentive to workers to exert too much effort.
Keywords: Efficiency; Performance Pay; Selection
JEL Codes: D82; J30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| performance pay (J33) | self-selection of higher-quality workers (J24) |
| self-selection of higher-quality workers (J24) | firm productivity (D22) |
| performance pay (J33) | excessive effort exertion by workers (J28) |
| excessive effort exertion by workers (J28) | social inefficiency (D61) |
| performance pay (J33) | equilibrium incentive structure (D51) |
| equilibrium incentive structure (D51) | excessive effort exertion by workers (J28) |
| tax on high incomes (H24) | mitigate excessive incentives (D47) |