Contractual and Organizational Structure with Reciprocal Agents

53 Pages Posted: 31 Mar 2008

See all articles by Florian Englmaier

Florian Englmaier

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics

Stephen Leider

University of Michigan, Stephen M. Ross School of Business

Date Written: October 2008

Abstract

Empirically, compensation systems generate substantial effort despite weak monetary incentives. We consider reciprocal motivations as a source of incentives. We solve for the optimal contract in the basic principal-agent problem and show that reciprocal motivations and explicit performance-based pay are substitutes. A firm endogenously determines the mix of the two sources of incentives to best induce effort from the agent. Analyzing extended versions of the model allows us to examine how organizational structure impacts the effectiveness of reciprocity and to derive specific empirical predictions. We use the UK-WERS workplace compensation data set to confirm the predictions of our extended model.

Keywords: Optimal Contracts, Reciprocity, Organizational Structure

JEL Classification: D82, J33, M52

Suggested Citation

Englmaier, Florian and Leider, Stephen, Contractual and Organizational Structure with Reciprocal Agents (October 2008). CESifo Working Paper Series No. 2415, Available at SSRN: https://ssrn.com/abstract=1112973 or http://dx.doi.org/10.2139/ssrn.1112973

Florian Englmaier (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics ( email )

Ludwigstrasse 28 III/ VG
D-80539 Munich
Germany

Stephen Leider

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

HOME PAGE: http://www-personal.umich.edu/~leider/

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