Uncertainty, Pay for Performance, and Asymmetric Information
Posted: 22 Sep 2009
Date Written: October 2009
This article develops a new rationale for the emergence of pay-for-performance contracts where the labor market is competitive, workers are risk averse, and firms are risk neutral and unaware of workers' productivities. The article shows that the prevalence of pay for performance rises and the pay-for-performance sensitivity falls as environmental uncertainty increases. This empirical regularity is unaccounted for alternative models such as the standard agency model.
JEL Classification: D86, L2, M5, J3
Suggested Citation: Suggested Citation