Differentiation and Risk Aversion in Imperfectly Competitive Labor Markets

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.

Adverse selection · Competition (biology) · Cournot competition · Economics · Expected utility hypothesis · Financial economics · Imperfect competition · Incentive · Industrial organization · Interim · Microeconomics · Moral hazard · Private information retrieval · Product differentiation · Risk aversion (psychology) · Corporate Finance and Governance · Economic Policies and Impacts · Politics, Economics, and Education Policy

• Regulating Product Return Policies

  Open Access•Shmuel I Becher, Eberhard Feess et al.•The Journal of Legal Studies•2023

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