Who pays for workplace benefits?

Abstract

In a simple model with hidden action, we analyze the role of nonwage benefits (perks) in the structure of incentive‐compatible contracts. We show that the provision of perks depends on the size of the agent’s reservation wage. The two main results are: (a) for low levels of the reservation wage, perks are never provided by the principal, but the agent may decide to buy, as own consumption, a certain amount of private benefits; (b) for high levels, the principal may find it profitable to offer perks, and the equilibrium quantity increases more than proportionally with the reservation wage, up to the first‐best level.