Reputation and Pay Structure in Dynamic Contracts

39 Pages Posted: 11 Aug 2013 Last revised: 14 Aug 2013

See all articles by Dominique Demougin

Dominique Demougin

EBS Universität für Wirtschaft und Recht - EBS Business School - Department of Governance & Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Oliver Fabel

Chair for International Personnel Management, Institute of Business Administration, Faculty of Economics and Business, University of Vienna

Christian J. Thomann

CESIS Centre of Excellence for Science and Innovation Studies; Stockholm School of Economics - Stockholm School of Economics - Swedish House of Finance, Students

Multiple version iconThere are 2 versions of this paper

Date Written: August 14, 2013

Abstract

Assuming a liquidity constrained agent, we characterize the optimal implicit contract in a repeated game characterized by moral hazard. With longer expected contract duration, bonus pay is shown to decrease while salary promise and productivity increase. We test our model using personnel data of an insurance company: accounting for the trade-off between salary and performance pay, we confirm that the former (latter) is positively (negatively) correlated with productivity. Longer expected contract duration impacts all three key variables -- i. e. performance pay, salary promise, and productivity -- as predicted by our theoretic model.

Keywords: implicit contract, explicit bonus pay, premature contract termination, compensation and productivity estimates

JEL Classification: J3, M5

Suggested Citation

Demougin, Dominique and Fabel, Oliver and Thomann, Christian J., Reputation and Pay Structure in Dynamic Contracts (August 14, 2013). Available at SSRN: https://ssrn.com/abstract=2308563 or http://dx.doi.org/10.2139/ssrn.2308563

Dominique Demougin

EBS Universität für Wirtschaft und Recht - EBS Business School - Department of Governance & Economics ( email )

International University Schloss Reichartshausen
Campus Wiesbaden, Soehnleinstrasse 8A
Wiesbaden, 65201
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Muenchen, 81679
Germany

Oliver Fabel (Contact Author)

Chair for International Personnel Management, Institute of Business Administration, Faculty of Economics and Business, University of Vienna ( email )

Oskar-Morgenstern-Platz 1
Vienna, A1090
Austria
+43-1-4277-38161 (Phone)

HOME PAGE: http://ipersonal.univie.ac.at/index.php?id=home1

Christian J. Thomann

CESIS Centre of Excellence for Science and Innovation Studies ( email )

Lindstedtsvägen 30-100 44
Stockholm, SE-100 44
Sweden

Stockholm School of Economics - Stockholm School of Economics - Swedish House of Finance, Students ( email )

111 60 Stockholm
Sweden

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