Working Paper: NBER ID: w18936
Authors: Roland Bénabou; Jean Tirole
Abstract: This paper analyzes the impact of labor market competition and skill-biased technical change on the structure of compensation. The model combines multitasking and screening, embedded into a Hotelling-like framework. Competition for the most talented workers leads to an escalating reliance on performance pay and other high-powered incentives, thereby shifting effort away from less easily contractible tasks such as long-term investments, risk management and within-firm cooperation. Under perfect competition, the resulting efficiency loss can be larger than that imposed by a single firm or principal, who distorts incentives downward in order to extract rents. More generally, as declining market frictions lead employers to compete more aggressively, the monopsonistic underincentivization of low-skill agents first decreases, then gives way to a growing overincentivization of high-skill ones. Aggregate welfare is thus hill-shaped with respect to the competitiveness of the labor market, while inequality tends to rise monotonically. Bonus caps and income taxes can help restore balance in agents' incentives and behavior, but may generate their own set of distortions
Keywords: Labor Market Competition; Skill-Biased Technical Change; Compensation Structures; Performance Pay; Incentives; Multitasking
JEL Codes: D31; D82; D86; J31; J33; L13; M12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased competition for talented workers (J69) | Greater reliance on performance pay (J33) |
| Greater reliance on performance pay (J33) | Shift in effort allocation away from less measurable tasks (D29) |
| Increased competition for talented workers (J29) | Shift in effort allocation away from less measurable tasks (D29) |
| Decline in market frictions (F12) | Overincentivization of high-skill agents (D82) |
| Decline in market frictions (F12) | Underincentivization of low-skill agents (D82) |
| Labor market competitiveness (J48) | Hill-shaped relationship between aggregate welfare and labor market competitiveness (E24) |
| Regulatory measures (like bonus caps and income taxes) (F38) | Restore balance in incentives (J33) |