Bonus Culture: Competitive Pay, Screening, and Multitasking
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
We thank Daron Acemoglu, Sylvain Chassang, Wouter Dessein, Xavier Gabaix, Thomas Mariotti, Harry Di Pei, Wolfgang Pesendorfer, Canice Prendergast, David Sraer, Lars Stole, Glen Weyl and participants in conferences and seminars at Maastricht University, TSE-IAST, CEPR, the NBER Summer Institute, Princeton University, Columbia GSB, Chicago GSB, the Institute for Advanced Study, CIFAR, Yale University and the Econometric Society Winter Meetings for helpful comments. Both authors gratefully acknowledge financial support from the ERC programme grant FP7/2007-2013 No. 249429, "Cognition and Decision-Making: Laws, Norms and Contracts". Bénabou also gratefully acknowledges support from the Canadian Institute for Advanced Research. Doron Ravid and Juha Tolvanen provided superb research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Roland Bénabou & Jean Tirole, 2016. "Bonus Culture: Competitive Pay, Screening, and Multitasking," Journal of Political Economy, University of Chicago Press, vol. 124(2), pages 000 - 000. citation courtesy of