A Rent Extraction View of Employee Discounts and Benefits

47 Pages Posted: 22 Oct 2004

See all articles by Anthony M. Marino

Anthony M. Marino

University of Southern California - Marshall School of Business

Jan Zabojnik

Queen's University - Department of Economics

Date Written: October 16, 2005

Abstract

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

Marino, Anthony M. and Zabojnik, Jan, A Rent Extraction View of Employee Discounts and Benefits (October 16, 2005). Available at SSRN: https://ssrn.com/abstract=608041 or http://dx.doi.org/10.2139/ssrn.608041

Anthony M. Marino

University of Southern California - Marshall School of Business ( email )

Dept. of Finance & Business Economics
Los Angeles, CA 90089
United States
213-740-6525 (Phone)
213-740-6650 (Fax)

Jan Zabojnik (Contact Author)

Queen's University - Department of Economics ( email )

94 University Avenue
Kingston, Ontario K7L 3N6
Canada
613-533-2275 (Phone)
613-533-6668 (Fax)

HOME PAGE: http://qed.econ.queensu.ca/faculty/zabojnik/Page/

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