in-kindpaymentsasacompensationstrategy.pdf

USC FBE APPLIED ECONOMICS/CLEO WORKSHOP presented by Ján Zábojník FRIDAY, September 19, 2003 1:30 pm - 3:00 pm; Room: HOH-601K In-Kind Payments as a Compensation Strategy∗ Anthony M. Marino Ján Zábojník Marshall School of Business Marshall School of Business University of Southern California University of Southern California Los Angeles, CA 90089-1427 Los Angeles, CA 90089-1427 September 15, 2003 Abstract In this paper, we offer a new explanation for the use of non-cash compensation by firms. We show that employee discounts allow firms to practice price discrimination between employees and non-employees in a value enhancing manner. In particular, the optimal price discriminating employment contract offers a firm’s product at a lower price to the firm’s employees than to outside consumers. We also characterize optimal bundling of cash and on the job perks and show that the firm can use the perks to extract information rent from employees with private information about their preferences and reservation utility. The level of perks in the optimal employment contract can be lower or higher than the socially efficient level. Thus, in our model overinvestment in managerial perks is a profit-maximizing strategy, rather than a consequence of agency problems. JEL Classifi cation: J3, L2. Key Words