INCENTIVE ROLES OF FRINGE BENEFITS IN COMPENSATION CONTRACTS

The purpose of this paper is to establish a new insight into the poten tial benefit of fringe benefits used by firms in compensation contract s. We show that fringe benefits have a role to provide incentives and reduce agency costs. Ln an agency model with moral hazard, we examine the optimal incentive package that involves salary, equity shares, and fringe benefits. Based on the notion that fringe benefits are imperfe ct substitutes for salary and (weakly) complementary to effort, we sho w how the optimal package may include an excessive provision of fringe benefits that exceeds the first-best level, and why it involves a dis tortion towards overconsumption of fringe benefits in terms of the man ager's preferences.