Implicit vs. Explicit Incentives: Theory and a Case Study

40 Pages Posted: 19 May 2009

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: May 2009

Abstract

We derive the optimal contract between a principal and a liquidity-constrained agent in a stochastically repeated environment. The contract comprises a court-enforceable explicit bonus rule and an implicit fixed salary promise that must be self-enforcing. Since the agent's rent increases with bonus pay, the principal implements the maximum credible salary promise. Thus, the bonus increases while the salary promise and the agent's effort decrease with a higher probability of premature contract termination. We subject this mechanism to econometric testing using personnel data of an insurance company. The empirical results strongly support our theoretical predictions.

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., Implicit vs. Explicit Incentives: Theory and a Case Study (May 2009). CESifo Working Paper Series No. 2645, Available at SSRN: https://ssrn.com/abstract=1406944 or http://dx.doi.org/10.2139/ssrn.1406944

Dominique Demougin (Contact Author)

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

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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
117
Abstract Views
1,222
rank
236,303
PlumX Metrics