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Journal of Law, Economics, and Organization Advance Access published online on November 25, 2008
Journal of Law, Economics, and Organization, doi:10.1093/jleo/ewn022
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© The Author 2008. Published by Oxford University Press on behalf of Yale University. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org

Uncertainty, Pay for Performance, and Asymmetric Information

Felipe Balmaceda*

Universidad de Chile

* Centro de Economía Aplicada, Departamento de Ingeniería Industrial, Universidad de Chile, República 701, Santiago 6521122, Chile. E-mail: fbalmace{at}dii.uchile.cl.

This article develops a new rationale for the emergence of pay-for-performance contracts where the labor market is competitive, workers are risk averse, and firms are risk neutral and unaware of workers' productivities. The article shows that the prevalence of pay for performance rises and the pay-for-performance sensitivity falls as environmental uncertainty increases. This empirical regularity is unaccounted for alternative models such as the standard agency model.

I would like to thank the detailed comments of two anonymous referees and Nicolas Figeroa and participants in the regular seminar at the University of Chile for comments to an earlier version. As usual, all remaining errors are my own responsibility. This article received financial support from Fondecyt (grant no. 1060207).


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