Christina E. Bannier, Eberhard Feess, Natalie Packham, Markus Walzl

Differentiation and Risk Aversion in Imperfectly Competitive Labor Markets

Volume 177 () / Issue 1, pp. 1-27 (27)
Published 12.10.2020

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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.

Christina E. Bannier No current data available.

Eberhard Feess No current data available.

Natalie Packham No current data available.

Markus Walzl No current data available.