Eric Girardin: eric.girardin[at]univ-amu.fr
Christelle Lecourt: christelle.lecourt[at]univ-amu.fr
Paying for suggestions is often not feasible because the employees can seldom prove that they initiated the idea. However, when the suggestion yields better performance, the employer can provide incentives by paying for performance or by selling shares to the employees. We consider a simple principal-agent model (both risk neutral) where exogenous variables affect the performance as well. We show that selling shares is more efficient than performance pay as long as the employer is not limited in number of shares he can offer to purchase. The model lays the foundation of a theory that predicts differences in the efficiency of profit sharing and stock ownership.