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Englmaier, Florian; Leider, Stephen (2012): Contractual and organizational structure with reciprocal agents. In: American Economic Journal: Microeconomics, Vol. 4, No. 2: pp. 146-183

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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. (JEL D23, D86, J33, M12, M52).

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