This paper studies the role of match quality for contractual arrangements, wage dynamics and workers’ retention. We develop a model in which profit maximizing firms offer a performance-based pay arrangement to retain workers with relatively high match-specific productivity. The key implications of our model hold in data from the NLSY79, where information about job histories and performance pay is available. We relate our findings to the literature on occupation heterogeneity and provide evidence that jobs in “cognitive” occupations have better match quality, exhibit higher prevalence of performance pay, display significant sensitivity of wages to business cycle conditions and last longer.
M52: Personnel Economics: Compensation and Compensation Methods and Their Effects
M55: Personnel Economics: Labor Contracting Devices
J33: Compensation Packages; Payment Methods
J41: Labor Contracts
E24: Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital