Perks in Long-term Contracts

Perks are a commodity bundle offered by an employer to an employee. We provide two dynamic models. First, we assume non-separable utility function between effort and both of a perk good and money, extending Bennardo, Chiappori and Song (2010). There are two forces affecting the incentive compatibility constraint: higher promised utility makes the incentive compatibility constraint more binding, and if the higher promised utility is too costly then a principal may reduce the implemented effort. When the first effect is stronger than the second, the principal gives more perk good as successful outcomes accumulate. In the second model, an agent can save money privately (i.e. hidden saving), but not a perk good. Increasing monetary payment today makes it more difficult to satisfy the today's hidden saving constraint, but makes it easier to satisfy the yesterday's hidden saving constraint. When the second effect is larger than the first, the principal gives more perk as successful outcomes accumulate.