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Managerial accountability for payroll expense and firm-size wage effects

By Robertas Zubrickas

Abstract

We argue that job performance appraisal is an agency problem with asymmetric transfer values: an employee is paid in proportion to the rating received from his line manager, who only partially internalizes the resultant payroll cost. This asymmetry in rating valuations is based on evidence that managers are not fully accountable for payroll expense, with the degree of unaccountability increasing in fi…rm size. We develop a nested agency model of economic organization of a fi…rm with unaccountable managers, which in equilibrium obtains the …firm-size wage effects the large-fi…rm wage premium and inverse relationship between fi…rm size and wage dispersion.Compression of ratings, managerial incentives, soft budget constraint, firm-size wage effects, principal-agent model

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