Washington University in Saint Louis - John M. Olin Business School
Leslie M. Marx
Duke University - Fuqua School of Business, Economics Group
September 15, 1998
We analyze a multiple-activity principal-agent model in which the activities are naturally substitutable for the agent and complementary for the principal. A basic result is that the optimal compensation mechanism must cause the agent to view the activities as complements. This complementarity is achieved by using a compensation scheme that makes success on multiple dimensions the sole source of large rewards. A number of empirical implications follow, along with explanations for some existing empirical findings. We also discuss applications to compensation in specific occupations.
Number of Pages in PDF File: 58
JEL Classification: D81working papers series
Date posted: October 8, 1998
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