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Department of Business and Management Science, Norwegian School of Economics (NHH) Discussion Papers, Department of Business and Management Science, Norwegian School of Economics (NHH)

No 2006/22:
The rise of individual performance pay

Ola Kvaløy () and Trond E. Olsen ()

Abstract: Why does individual performance pay seem to prevail in human-capital-intensive industries where teamwork is so common? We present a model that aims to explain this. In a repeated game model of relational contracting, we analyze the conditions for implementing peerdependent incentive regimes when agents possess indispensable human capital. We show that the larger the share of values that the agents can hold-up, the lower is the implementable degree of peer-dependent incentives. In a setting with team effects - complementary tasks and peer pressure, respectively - we show that while group-based incentives are optimal if agents are dispensable, it may be costly, and in fact suboptimal, to provide team incentives once the agents become indispensable.

Keywords: Relational contracts; multiagent moral hazard; indispensable human capital; (follow links to similar papers)

JEL-Codes: D23; J33; L14; (follow links to similar papers)

28 pages, December 11, 2006

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