DP4511 Performance Pay and Adverse Selection

Author(s): Espen R Moen, Åsa Rosén
Publication Date: August 2004
Keyword(s): efficiency, performance pay, selection
JEL(s): D82, J30
Programme Areas: Labour Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=4511

It is well known in personnel economics that firms may improve the quality of their workforce by offering performance pay. We analyse an equilibrium model where worker productivity is private information and show that the gains to the firms from worker self-selection may not be matched by a corresponding social gain. In particular, the equilibrium incentive to workers to exert too much effort.