Present-biased preferences and optimal compensation schedules: a note

Abstract

This paper presents a very simple model with present biased agents where optimal compensation schedules may be back-loaded, which is a characteristics of wage contracts we often observe in reality. There is large evidence that workers are often paid less than their marginal productivity early in their careers, and more than their marginal productivity later. In this model, back-loaded wage schedules emerge as a commitment device that allows to prevent sub-optimal consumption and labor supply patterns