Incentives, Wages, and Promotions: Theory and Evidence

Abstract

I study an incentive problem that has been largely ignored in the agency literature: incentives for repeated (human capital) investment. The optimal contract is very simple but still provides rich implications for incentive and wage structures in large organizations. The empirical evidence is presented using personnel records of health insurance claim processors in a large U.S. insurance company. These processors are white-collar, nonmanagerial, female, service industry workers - a rapidly growing but rarely studied labor group. The empirical findings are consistent with the main features of the optimal contract.