We study bonuses in a flat hierarchy and find effort optimality to be violated a two worker-type model with noisy performance indicators. Dedicated workers extract informational rents from firms whilst slack worker effort is inefficiently low. Whilst increases in measurement noise reduce the supply-side effort effects of increasing bonuses. Our model helps to explain empirical observations that bonuses are more prevalent and larger in jobs with noisy environments, such as within the financial sector.
|Journal||The Economic Record|
|Early online date||21 Oct 2022|
|Publication status||E-pub ahead of print - 21 Oct 2022|
- informational rent