Deferred Compensation and Turnover
25 Pages Posted: 22 Aug 2006
Date Written: August 17, 2006
Abstract
This paper analyzes the interaction between wage contracts with deferred compensation and worker turnover. While deferred compensation improves the workers' incentives to exert effort, it distorts turnover decisions. We show that deferred compensation is less attractive when overall turnover in the market is high. Furthermore, we may have multiple equilibria: a low-turnover equilibrium where firms use deferred compensation to motivate workers, and a high-turnover equilibrium where they do not. Our model provides an explanation for observed differences in turnover rates between countries, e.g., US and Japan and between regions, e.g., Silicon Valley and Route 128.
Keywords: Deferred Compensation, Incentive Contracts, Multiple Equilibria, Turnover
JEL Classification: J33, J41, J63
Suggested Citation: Suggested Citation
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