A Rent Extraction View of Employee Discounts and Benefits
47 Pages Posted: 22 Oct 2004
Date Written: October 16, 2005
We offer a novel view of employee discounts and in kind compensation. In our theory, bundling perks and cash compensation allows a firm to extract information rents from employees who have private information about their preferences for the perk and about their outside opportunities. We show that in maximizing profit with heterogeneous workers, the firm creates different bundles of the perk and salary in response to different employee characteristics and marginal costs of the perk. Our key result is that strategic bundling can lead firms to provide perks even in the absence of any cost advantage over the outside market and to deviate from the standard marginal cost pricing rule. We characterize how this deviation depends upon the set of feasible contracts, upon the perk's marginal cost, and upon the correlation between the agents' preferences for the good and their reservation utilities.
Keywords: Employee Discounts, In Kind Compensation, Bundling, Optimal Employment Contracts
JEL Classification: J3, L2, D82
Suggested Citation: Suggested Citation