The Korean Economic Review
Perks in Long-term Contracts
YiLi Chien (Federal Reserve Bank of St. Louis), Minseong Kim (Sungkyunkwan University) and Joon Song (Sungkyunkwan University)Year 2013Vol. 29No. 1
Perks are a commodity bundle offered by an employer to an employee. We provide twodynamic models. First, we assume non-separable utility function between effort and both ofa perk good and money, extending Bennardo, Chiappori and Song (2010). There are twoforces affecting the incentive compatibility constraint: higher promised utility makes theincentive compatibility constraint more binding, and if the higher promised utility is toocostly then a principal may reduce the implemented effort. When the first effect is strongerthan the second, the principal gives more perk good as successful outcomes accumulate. Inthe second model, an agent can save money privately (i.e. hidden saving), but not a perkgood. Increasing monetary payment today makes it more difficult to satisfy the today’shidden saving constraint, but makes it easier to satisfy the yesterday's hidden savingconstraint. When the second effect is larger than the first, the principal gives more perk assuccessful outcomes accumulate.