Roland Bénabou, and Jean Tirole, “Bonus Culture: Competitive Pay, Screening and Multitasking”, Journal of Political Economy, vol. 124, n. 2, April 2016, pp. 305–370.
To analyze the impact of labor market competition on the structure of compensation, we embed multitasking and screening within a Hotelling framework. Competition for talent leads to an escalation of performance pay, shifting effort away from long-term investments, risk management, and cooperation. Efficiency losses can exceed those from a single principal, who dulls incentives to extract rents. As competition intensifies, monopsonistic underincentivization of low-skill agents first decreases and then gives way to growing overincentivization of high-skill ones. Aggregate welfare is thus hill-shaped, while inequality tends to rise monotonically. Bonus caps can help restore balance in incentives but may generate other distortions.
Roland Bénabou, and Jean Tirole, “Bonus Culture: Competitive Pay, Screening and Multitasking”, TSE Working Paper, n. 12-367, April 2012, revised March 2013.