Efficiency Wages and X-Inefficiencies

Abstract

Within most organizations, agents may spend time on a variety of tasks, productive and redistributive. In this paper, I derive an optimal multi-task incentive scheme under the realistic assumption that agents have limited liability. The wage level is shown to increase with an agent's discretion and the organization's profits. With multiple agents, it is generally not optimal for the principal to fully eliminate distributional conflict within the organization. The resulting influence costs constitute a measure of X-inefficiency. The paper illuminates the relationship between competition and influence costs, emphasizing the role of the organization's production technology.

JEL Classification: J41, J31, L22