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Cover of: Differentiation and Risk Aversion in Imperfectly Competitive Labor Markets
Eberhard Feess, Christina E. Bannier, Markus Walzl, Natalie Packham

Differentiation and Risk Aversion in Imperfectly Competitive Labor Markets

Section: Articles
Volume 177 (2021) / Issue 1, pp. 1-27 (27)
Published 12.10.2020
DOI 10.1628/jite-2020-0044
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  • 10.1628/jite-2020-0044
Summary
We examine the effect of imperfect labor market competition on the efficiency of compensation schemes in a setting with moral hazard and risk-averse agents who have private information on their ability. Two heterogeneous firms compete for agents by offering contracts with fixed and variable payments. When competition is low, low-ability agents are underincentivized, exerting too little effort. When competition is high, high-ability agents are overincentivized and bear too much risk. For intermediate competition, contracts are second-best. An equilibrium where both firms are active exists only when the least-cost separating allocation is interim efficient.