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Contractual and Organizational Structure with Reciprocal Agents

Florian Englmaier and Stephen Leider
American Economic Journal: Microeconomics
Vol. 4, No. 2 (May 2012), pp. 146-183
Stable URL: http://www.jstor.org/stable/23249437
Page Count: 38
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Contractual and Organizational Structure with Reciprocal Agents
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Abstract

We solve for the optimal contract when agents are reciprocal, demonstrating that generous compensation can substitute for performance-based pay. Our results suggest several factors that make firms more likely to use reciprocal incentives. Reciprocity is most powerful when output is a poor signal of effort and when the agent is highly reciprocal and/or productive. Similarly, reciprocal incentives are attractive when firm managers have strong incentive pay and discretion over employee compensation. While reciprocal incentives can be optimal even when identical firms compete, a reciprocity contract is most likely when one firm has a match-specific productivity advantage with the agent.

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