some comments on free riding in leontief partnerships hans k hvide holmstrom bell journal of economics 13 1982 324 40 showed that freeriding is inevitable in partnerships where inputs are substitutes legros and matthews review of economic studies 68 1993 599 611 and vislie journal of economics behavior and organization 23 1994 83 91 showed that when inputs are strict complements leontief technology free riding can be avoided with a linear sharing rule this paper considers the robustness and some extensions of the positive result of these articles first i show that legros and matthews s and vislie s results are not robust to the introduction of participation constraints and limited liability however i construct a novel rule that mitigates that problem second i perturb the deterministic model of the other authors it turns out that free riding is avoidable with noise added to joint output and is inevitable when noise is added to individual productivity jel c72 d20 d29 d82 i introduction a long tradition in economics compares the performance of different ownership arrangements of firms capitalist firms are defined through separating ownership and production by having an outside owner and partnership firms split the value of production in full between the partners building on alchian and demsetz 1972 the seminal paper by holmstrom 1982 argues that partnership firms may suffer from free riding problems holmstrom 1982 shows that efficient provision of effort is not consistent with nash behavior in static partnership games where inputs are substitutes and actions are noncontractible capitalist firms on the other hand can mitigate the free rider problems by a principal breaking the budget i e keep some of the surplus for oneself whenever one observes a low joint output motivated by the many examples of partnerships in the real world considerable literature has questioned the generality of holmstrom s result 1 the present article considers a particular branch of that literature works that explore effort taking in leontief partnerships partnerships where joint output is determined by the partner with the least effort 2 legros and matthews 1993 section 3 1 and vislie 1994 hereafter abbreviated lmv find that if production is determined in such a manner there exists a linear sharing rule denoted beta sup that implements the efficient provision of effort and hence eliminates free riding the intuition for this result is that given that the other agents stick to the efficient action no agent can gain by providing more effort because output does not change and can be made to support the full decrease in output since his deviation is proportional to the change in output the present article discusses the robustness of the implementation result of lmv in two different directions by introducing participation constraints and limited liability on one hand and by introducing noise in the production on the other hand let me articulate why it is important to test for robustness along these two directions first the partnership literature has largely ignored whether a partnership can be expected to agree ex ante on efficient sharing rules when such rules exist the interesting problem is that a partner with a strong bargaining power may wish to settle on a non efficient rule if that gives him or herself a greater return hence it is of importance to have sharing rules that make provision of effort incentive compatible under any distribution of participation constraints to distribute a large share of surplus to agents with strong bargaining power proposition 1 see below constructs a simple sharing rule that solves the participation problem this sharing rule which is inspired by the groves s mechanism has the attractive property of implementing the efficient provision of effort under any conceivable distribution of participation constraints

regulation of multiagent research and development this article focuses on the regulation problems raised by two specific characteristics of research and development first it is normally desirable that several units pursue the same goal and second that only the best of the final products made by these units is worthwhile to society when firms have private information these characteristics are seen to generate a substitution effect which in some situations implies that the resources allocated to r d under asymmetric information are excessive relative to the full information allocation i thus identify asymmetric information as one possible source of excessive allocations to research and development

too much monitoring not enough performance pay this paper endogenises the internal organisation of competitive firms in a simple general equilibrium framework the options are monitored teams unmonitored teams motivated by collective performance pay and self employment the choice of incentive scheme depends on market price and also affects price through its influence on output as more people opt for self employment pecuniary externalities increase the pressure on the rest to follow suit and pareto rankable multiple equilibria arise the conditions for a competitive equilibrium to be constrained efficient are restrictive and everyone may gain from policies limiting monitoring and self employment and from the imposition of entry taxes

moral hazard in risk averse teams holmstrom 1982 has shown that a non budget balancing contract induces a team of risk neutral agents to choose the first best effort levels this is not generally true when agents are risk averse furthermore a massacre contract which punishes all but one agent when the outcome is low can attain the first best over a wider range of parameters than any other budget balancing contract

efficiency and equilibria in complementary teams abstract this paper considers a team or partnership where the partners effort levels enter as strict complements in the production function the existence of a linear budget balancing sharing mechanism is demonstrated which implements the team s efficient outcome as a nash equilibrium this result is in contrast to a result derived in holmstrom 1982

limited liability and incentive contracting with ex ante action choices abstract this article examines a principal agent model of financial contracting in which a risk neutral entrepreneur agent makes an unobservable ex ante effort choice while employing the investment funds of a risk neutral investor principal the key innovation is that the investment contract is subject to statutory liability limits given these liability limits two settings are considered one in which the investor payoff function is also constrained to be monotonically nondecreasing in firm profit and another in which no such monotonic contract constraint is imposed in the former case a standard debt contract is shown to emerge and a first best effort choice is not achieved in the latter setting the optimum is characterized by a live or die payoff function and a first best effort level may or may not be realized

wealth effects distribution and the theory of organization abstract we construct a general equilibrium model of firm formation in which organization is endogenous firms are coalitions of agents providing effort and investment capital effort is unobservable unless a fixed monitoring cost is paid and borrowing is subject to a costly state verification problem because incentives vary with an agent s wealth different types of agents become attractive firm members under different circumstances when borrowing is not costly firms essentially consist of one type of agent and are organized efficiently but when the costly state verification problem is sufficiently severe firm organization will depend on the distribution of wealth with enough inequality it will tend to be dictated by incentives of rich agents to earn high returns to wealth even if the chosen organizational form is not a technically efficient way to provide incentives journal of economic literatureclassification numbers d2 d31 j41 l2

peer pressure and partnerships partnerships and profit sharing are often claimed to motivate workers by giving them a share of the pie but in organizations of any significant size the free rider effects would seem to choke off

optimal sales force diversification and group incentive payments in this research we show that the interaction between territory allocation and sales force compensation two key drivers of sales productivity strongly affects the firm s profitability we analyze an agency theoretic model that jointly considers the degree of negative or positive correlation across territory outcomes differences in territories sales potentials the agency problem with risk averse salespeople and the availability of both own territory compensation elements such as commission and elements dependent on the performance of others such as group commissions or tournaments we find that allocating salespeople to negatively correlated sales territories beneficially diversifies each salesperson s portfolio of sales outcomes when this allocation includes a group commission pay component and can improve profitability even with a decrease in average territory sales performance in a larger sales force a balanced allocation of salespeople coupled with a group commission dominates an imbalanced allocation comparing piece rate compensation with or without a group commission component to tournaments alongside the allocation problem we find that tournaments are favored over piece rate plans when territories are highly positively correlated territory sales potentials are similar and salespeople have a low disutility for effort and are not very risk averse a piece rate plan conversely dominates a tournament when these conditions are reversed

dynamic production teams with strategic behavior abstract we analyze if intergenerational teams reveal workers productivities some uncertainty on agents productivities persists when i each agent must work independently or ii technological shocks are agent specific in compulsory teams however when technological shocks are team specific in compulsory teams each worker s productivity is revealed when agents choose to work independently or in teams that problem falls in the class of dynamic games elective teams are preferred by high productivity young workers when the technological shocks are agent specific and maximize the expected utility of a young worker when shocks are team specific

dynamics of a household norm in female labour supply abstract this paper develops a continuous variant of the theory of social custom of akerlof q j econom 94 1980 749 to model the impact of a traditional household norm on married women s labour supply the erosion of this norm is treated as the endogenous result of feedback of the labour supply behaviour on the norm beliefs these endogenous dynamics are shown to imply multiple long run equilibria on both the individual and collective levels exhibiting hysteresis and mutual transitions dependent on the wage rate it is suggested that these properties have played important roles in the long run increase in married women s labour supply in many oecd countries

nonpoint pollution control inducing first best outcomes through the use of threats abstract this paper develops an economic model to analyze the use of a policy that combines a voluntary approach to controlling nonpoint source pollution with a background threat of an ambient tax if the voluntary approach is unsuccessful in meeting a pre specified environmental goal we show that such a policy can be designed to induce cost minimizing abatement without actually imposing the tax because the threat of imposition of the tax is sufficient to induce voluntary compliance thus the combined policy approach can not only be more effective in protecting environmental quality than a pure voluntary approach but can also be less costly than a pure ambient tax approach however whether the cost minimizing choices are a unique equilibrium or not depends on the design of the tax policy and whether or not it can be applied retroactively all results still hold if the background threat takes the form of a reducing in government subsidies

is there a trade off between supervision and wages an empirical test of efficiency wage theory abstract the logic of efficiency wage theory suggests a trade off between wages and supervision this paper reports evidence that high levels of supervision are indeed associated with lower wage levels the empirical investigation centers on the effect that safety supervision by host employers has on the wages of contract maintenance workers in the petrochemical industry this narrow focus is important special institutional features of the contract employment relationship in petrochemicals make it possible to ameliorate econometric problems that may have influenced earlier studies

auctioning incentive contracts this paper draws a remarkably simple bridge between auction theory and incentive theory it considers the auctioning of an indivisible project among several fi rms the firms have private information about their future cost at th e bidding stage and the selected firm ex post invests in cost reduct ion the authors show that 1 the optimal auction can be implemented by a dominant strategy auction that uses information about both the first bid and the second bid 2 the winner faces a linear incenti ve contract 3 the fixed transfer to the winner decreases with his announced expected cost and increases with the second lowest announce d expected cost and 4 the share of cost overruns borne by the winn er decreases with the winner s announced expected cost copyright 1987 by university of chicago press

team production in competitive labor markets with adverse selection abstract team production is a frequent feature of modern organizations combined with team incentives team production can create externalities among workers since their utility upon accepting a contract depends on their team s performance and therefore on their colleagues productivity we study the effects of such externalities in a competitive labor market if workers have private information on their productivity we find that in any competitive equilibrium there must be pareto efficient separation of workers according to their productivity we further find that externalities facilitate equilibrium existence where under a particular condition on workers indifference curves even arbitrarily small externalities guarantee equilibrium existence

social norms and moral hazard the probability of income loss depends on talent and effort effort has positive externalities and therefore individuals are awarded status in proportion to their perceived diligence the social no

subjective performance measures in optimal incentive contracts objective measures of performance are seldom perfect in response incentive contracts often include important subjective components that mitigate incentive distortions caused by imperfect objective measures this paper explores the combined use of subjective and objective performance measures in respectively implicit and explicit incentive contracts naturally objective and subjective measures often are substitutes sometimes strikingly so we show that if objective measures are sufficiently close to perfect then no implicit contracts are feasible because the firm s fallback position after reneging on an implicit contract is too attractive we also show however that objective and subjective measures can reinforce each other if objective measures become more accurate then in some circumstances the optimal contract puts more weight on subjective measures because the improved objective measures increase the value of the ongoing relationship and so reduce the firm s incentive to renege we also analyze the use of subjective weights on objective performance measures and provide case study evidence consistent with our analyses

widening and deepening reforming the european union the european union is the product of a unique institutional process individual states often with a history of belligerent relationships have gradually given up ever more sovereignty to produce an increasing number of common goods including the single market a joint cur rency and common policies in the process the union has integrated increasingly diverse coun tries and achieved institutional progress beyond its borders these achievements are particularly remarkable given that member states have had and still have widely different views of the desirable speed and ultimate depth of integra tion possibly the single most powerful force sustaining the process of integration has been the implicit and often explicit threat by more committed member states to form an inner core a club in the club conversely less enthusias tic members have supported extending member ship to more countries as a strategy to frustrate deeper integration

decomposing trends in income volatility the wild ride at the top and bottom we use 2 year panels from the current population survey to provide a detailed accounting of family income volatility from 1980 to 2009 volatility doubled overall and the increase was most pronounced among the top 1 of the income distribution but in any given year the level of volatility among the bottom 10 exceeds that of the top the increased volatility comes from higher instability of head and spouse earnings other nonlabor income and from reduced covariance between these income sources with the tax system this suggests that current tax policy is less effective in mitigating income shocks than previous decades jel j31 i30

culture and ceo compensation the theory and research on chief executive officer ceo compensation tends to be dominated by assumptions and values reflective of those dominant in the national culture of the united states where most of this work is done this suggests that an underlying theme focuses on how ceo compensation is related to instrumental choices made in a competitive capitalist culture this study seeks to expand the understanding of ceo compensation by examining it in the context of other cultures based on the premise that national culture plays a significant part in the nature of compensation strategies we relate cultural dimensions uncertainty avoidance power distance individualism and masculinity femininity developed by hofstede hofstede 1980a 2001 to several dimensions of ceo compensation these dimensions are total ceo pay the proportion of variable pay to total compensation and the ratio of ceo pay to the lowest level employees the main findings of our paper are 1 all of the different dimensions of ceo pay were related to power distance leading us to infer that ceo pay in a culture is most reflective of the strength of the power structure in a society and 2 total compensation and the ratio of variable pay to total pay are related to individualism we conclude that cultural dimensions can contribute to understanding cross national ceo compensation the implication of this conclusion is that there are different ways that ceo compensation fits into the cognitive schema of various cultures and furthermore that these cognitive schema vary across societies that affect the nature of the cultural matrix into which money is incorporated bloch and parry 1989 p 1 moreover our results imply that particular forms of ceo compensation do not mean the same thing in different cultures but rather carry different symbolic connotations depending on the values dominant in a society thus not only does the compensation structure of a firm within a culture have a symbolic meaning within organizations e g trice and beyer 1993 but it can also be seen as an expression of deeper social values hofstede et al 1990 that may differ across countries

optimal mechanism design with resale via bargaining abstract in this paper we examine the optimal mechanism design of selling an indivisible object to one regular buyer and one publicly known buyer where inter buyer resale cannot be prohibited the resale market is modeled as a stochastic ultimatum bargaining game between the two buyers we fully characterize an optimal mechanism under general conditions surprisingly in this optimal mechanism the seller never allocates the object to the regular buyer regardless of his bargaining power in the resale market the seller sells only to the publicly known buyer and reveals no additional information to the resale market the possibility of resale causes the seller to sometimes hold back the object which under our setup is never optimal if resale is prohibited we find that the seller s revenue is increasing in the publicly known buyer s bargaining power in the resale market when the publicly known buyer has full bargaining power myerson s optimal revenue is achieved when the publicly known buyer has no bargaining power a conditionally efficient mechanism prevails

moral hazard and optimal contract form for r d cooperation abstract this paper aims to explain the use of different governance modes for r d cooperation we argue that ex ante cross licensing agreements are preferred to r d joint ventures if potential synergy effects are negligible and the double moral hazard problem caused by unobservable r d effort can be solved by an appropriate royalty scheme it is shown that the first best effort decisions are implementable by a cross licensing agreement if royalty payments are based on r d success however if the payments have to be based on actual know how transfer because r d success is not verifiable there are cases where joint ventures are necessary to induce optimal r d effort

income inequality in the united states 1913 1998 this paper presents new homogeneous series on top shares of income and wages from 1913 to 1998 in the united states using individual tax returns data top income and wages shares display a u shaped pattern over the century our series suggest that the large shocks that capital owners experienced during the great depression and world war ii have had a permanent effect on top capital incomes we argue that steep progressive income and estate taxation may have prevented large fortunes from fully recovering from these shocks top wage shares were flat before world war ii dropped precipitously during the war and did not start to recover before the late 1960s but are now higher than before world war ii as a result the working rich have replaced the rentiers at the top of the income distribution

public service motivation as an argument for government provision a public service motivation psm inclines employees to provide effort out of concern for the impact of that effort on a valued social service though deemed to be important in the literature on public administration this motivation has not been formally considered by economists when a psm exists this paper establishes conditions under which government bureaucracy can better obtain psm motivated effort from employees than a standard profit maximizing firm the model also provides an efficiency rationale for low powered incentives in both bureaucracies and other organizations producing social services 2000 elsevier science s a all rights reserved

optimal technology policy under asymmetric information in a research joint venture abstract we analyze the optimal technology policy to solve a free riding problem between the members of an rjv assuming that government intervention is subject to an additional adverse selection problem caused by its inability to distinguish the value of the potential innovation although subsidies and monitoring may be equivalent policy tools to solve firms free riding problem they imply different social losses if the government is not able to distinguish perfectly the value of the potential innovation the advantage of monitoring tools relative to subsidies is proved to depend on which type of information the government can obtain about firms r d performance

optimal contracting with endogenous social norms research in sociology and ethics suggests that individuals adhere to social norms of behavior established by their peers within an agency framework we model endogenous social norms by assuming that each agent s cost of implementing an action depends on the social norm for that action defined to be the average level of that action chosen by the agent s peer group we show how endogenous social norms alter the effectiveness of monetary incentives determine whether it is optimal to group agents in a single or two separate organizations and may give rise to a costly adverse selection problem when agents sensitivities to social norms are unobservable

an economic model of welfare stigma perhaps the most basic assumption of the economic theory of consumer demand is that more is better than less virtually all of the major propositions of consumer theory can in a certain sense be derived from the assumption that goods are good interestingly however this tenet seems to be violated by the behavior of many individuals in the low income population for many turn out to be eligible for a positive welfare benefit but do not in fact join the welfare rolls for example it has been estimated that in 1970 only about 69 percent of the families eligible for afdc aid to families with dependent children participated in the program see richard michel 1980 the corresponding percentage for afdc u the program for which families with an unemployed male are eligible was only 43 percent and the participation rate in the food stamp program was only 38 percent see maurice mcdonald 1977 this phenomenon has puzzled many investigators because such individuals do not locate on the boundaries of their budget sets consequently most investigators ignore the problem when studying the effects of welfare programs on behavior in this paper this seemingly irrational rejection of an increase in income is modeled as resulting from welfare stigma that is from disutility arising from participation in a welfare program per se 1 the existence of stigma has been amply documented in the sociological literature patrick horan and patricia austin 1974 lee rainwater 1979 where interviews of recipients have often uncovered feelings of lack of self respect and negative self characterizations from participation in welfare nevertheless this phenomenon has not been modeled and many questions consequently remain when is the disutility of participation strong enough to prevent participation shouldn t we expect individuals to weigh the disutility of participation against the potential benefit in their decisions what is the elasticity of participation with respect to the potential benefit also in a slightly different vein how are the work disincentives of welfare affected by stigma these questions have been given scant attention by economists yet they are crucial for our ability to predict the impact of various welfare programs on the lowincome population here these questions are addressed by modeling nonparticipation as a utility maximizing decision the model is developed and estimated for the afdc program 2 the model posits an individual utility function containing not just disposable income but

top executive rewards and firm performance a comparison of japan and the united states this paper studies top executive turnover and compensation and their relation to firm performance in the largest japanese and u s companies japanese executive turnover and compensation are related to earnings stock returns and to a lesser extent sales performance measures the fortunes of japanese top executives therefore are positively correlated with stock performance and current cash flows or with factors contributing to such performance the relations for the japanese executives are generally economically and statistically similar to those for their u s counterparts there is some evidence however that the fortunes of japanese executives are more sensitive to low income but less sensitive to stock returns than those of u s executives

efficient and nearly efficient partnerships this paper shows in two ways that the degree to which free riding diminishes the performance of deterministic partnerships may be less than has been generally thought first a necessary and sufficient condition is provided for a partnership to sustain full efficiency it implies that many non trivial partnerships sustain efficiency such as generic ones with finite action spaces and neoclassical ones with leontief technologies second approximate efficiency is shown to be achievable in a large class of partnerships including ones with smooth and monotonic production and disutility functions approximate efficiency is achieved by mixed strategy equilibria one partner takes with small probability an inefficient action the degree to which efficiency is approximated is restricted only by the amount of liability the partners can bear nonetheless their equilibrium payments are not arbitrarily large

asymmetric treatment of identical agents in teams abstract we investigate when identical agents will be treated asymmetrically in a simple team setting asymmetric treatment is optimal when the agents individual contributions to team performance are strategic complements symmetric treatment of identical agents is optimal when the agents contributions are strategic substitutes or when they are independent

contractual incompleteness and the optimality of equity joint ventures firms engaged in the pooling of complementary skills often choose the equity joint venture ejv over alternative profit sharing arrangements this paper addresses the issue of how equity shares are different from profit shares it is shown that in settings of contractual incompleteness marketable equity ownership when compared to non transferable profit sharing contracts provides better ex ante incentives to the parties involved by mitigating ex post hold up problems among other things the prevalence of the 51 49 or 50 50 ejv in which one party has 51 percent or 50 percent equity shares is explained

the regulation of multiproduct firms part i theory abstract this paper develops a normative model of the regulation of a multiproduct firm with private information about its technology and cost reducing activity it first characterizes the optimal regulatory scheme and illustrates it through examples it then derives necessary and sufficient conditions for the pricing incentive dichotomy to hold i e conditions under which the cost reimbursement rule but not pricing is used to provide incentives last the paper studies the regulation of the multiproduct firm in a general equilibrium framework both to assess the validity of the partial equilibrium approach and to formalize the notion of taxation by regulation

managerial turnover and the theory of short termism abstract this paper presents a novel theory of managerial short termism that is based on managerial turnover the key feature is that if managers rewards are based on current profitability and there is some probability of managerial turnover then rational own reward maximizing managers may choose projects that have intrinsically lower net present values but yield higher returns in the earlier part of their lives this is because managers recognize that the existence of turnover means that there is some probability they won t be around to enjoy the returns generated by long term projects

the impact of china s economic reforms on agricultural productivity growth this paper presents a method for assessing the relative importance of price increases and strengthened individual incentives due to the introduction of the responsibility system for the post 1978 increase in china s agricultural productivity data on post 1978 chinese agricultural performance suggest that a little over three quarters of the measured productivity increase is due to payment system changes and the remainder to price increases we also use our method to calculate incentive indices giving an estimate of the fraction of their marginal product that peasants received under the pre 1978 regime

the effects of optimism bias in teams this article imports a behavioural perspective into a team context to study the effort coordination problem among agents specifically we investigate how the presence of optimism bias impacts the severity of the free rider problem the organizational structure of the team and the compensation contracts offered to agents in equilibrium the results indicate that all agents become more reluctant to exert effort and the team welfare decreases when some of its agents are optimistic suggesting that optimism aggravates the free rider problem in teams appointing a team leader makes all agents work harder and the team benefits more by having the optimistic agent as its leader these findings are in sharp contrast to the effects of overconfidence as identified in the literature it is advisable to pay the optimistic agents less than the rational agents encouragingly optimistic agents can learn about their own bias in the long run leaving their team without too much detriment of optimism

understanding welfare stigma taxpayer resentment and statistical discrimination abstract welfare stigma is widely regarded to be of central importance in understanding the impact of welfare programs in their goal of alleviating poverty it affects both the decision to take up benefits and the well being of those who actually do this paper develops alternative models of the determinants of welfare stigma we identify two views a statistical discrimination approach and a taxpayer resentment view we discuss how each may be formalized and derive their implications we then examine what they imply about the relationship between stigma and program design

work environment and individual background explaining regional shirking differentials in a large italian firm the prevalence of shirking within a large italian bank appears to be characterized by significant regional differentials in particular absenteeism and misconduct episodes are substantially more prevalent in the south we consider a number of potential explanations for this fact different individual backgrounds group interaction effects sorting of workers across regions differences in local attributes different hiring policies and discrimination against southern workers our analysis suggests that individual backgrounds group interaction effects and sorting effects contribute to explaining the north south shirking differential none of the other explanations appears to be of first order importance i introduction whether individual behavior is determined by group interactions or by individual background is undoubtedly a fundamental question for the social sciences this question presented itself forcefully when we stumbled onto the following piece of evidence there appear to be significant regional differentials in the prevalence of shirking among the employees of a large italian bank in particular absenteeism and misconduct episodes are considerably more frequent in the southern branches of the bank in this paper we examine several potential explanations for this fact first individual preferences for shirking versus working may differ according to one s region of hirth we will refer to this hj othesis as one of different individual hackgrounds the second possibility is one of locational sorting low shirking types may tend to migrate to the north high shirking types may tend to migrate to the south or hoth third the northern and southern

an analysis of the principal agent problem most analyses of the principal agent problem assume that the principal chooses an incentive scheme to maximize expected utility subject to the agent s utility being at a stationary point an important paper of mirrlees has shown that this approach is generally invalid we present an alternative procedure if the agent s preferences over income lotteries are independent of action we show that the optimal way of implementing an action by the agent can be found by solving a convex programming problem we use this to characterize the optimal incentive scheme and to analyze the determinants of the seriousness of an incentive problem

firm leadership and innovative performance evidence from seven eu countries this paper considers the effect of different firm leadership on the innovative performance of firms from seven eu countries we investigate whether owner led or manager led firms achieve a larger share of their turnover with product innovations economic theory does not propose clear answers to this question in the empirical analysis it turns out that the manager led firms are more active innovators the share of sales based on new products is larger if firms managers do not hold any of the firms capital surprisingly there are no differences between the seven countries included in the regression analysis

the other side of the trade off the impact of risk on executive compensation the principal agent model of executive compensation is of central importance to the modern theory of the firm and corporate governance yet the exiting empirical evidence supporting it is quite wea

incentives and the structure of teams abstract this paper studies the relationship between moral hazard and the matching structure of teams we show that team incentive problems may generate monotone matching predictions in the absence of complementarities in the production technology second we analyze how complementarity in the underlying technology affects the matching predictions arising due to moral hazard we find that i even when the production technology is strongly complementary the incentive problem may lead to formation of negatively sorted teams ii as the degree of complementarity increases the optimal matching structure may switch from positive to negative solely due to the need to provide incentives

executive compensation and principal agent theory the empirical literature on executive compensation generally fails to specify a model of executive pay on which to base and test hypotheses regarding its determinants in contrast this paper analy

linear inequality methods to enforce partnerships under uncertainty an overview we review different generic conditions on stochastic outcome functions to enforce either efficient or nearly efficient partnerships their logical relationship is explored two kinds of conditions are considered however the property for an action profile to be compatible plays a crucial role in both kinds also two kinds of enforcement mechanisms are considered enforcement through utility transfers and enforcement through repetition

competition long run contracts and internal inefficiencies in firms abstract internal reward structures in firms are often integral parts of their culture and are changed infrequently in comparison to decisions about e g prices this paper investigates how this feature of firm organization provides a mechanism through which product market competition affects firms internal efficiency the design of firms internal organization is modeled as a choice of an incentive structure between a principal and an agent with strategic implications for firm s competitive positions on the product market it is shown that contrary to popular beliefs there may be a negative relation between the competitiveness of the product market and effort incentives

optimal contracts for teams in a team subject to both adverse selection each member s ability is known only to himself and moral hazard effort cannot be observed optimal contracts are under certain conditions linear in the team s output the outcome is the same whether the principal observes just the total output or each individual s contribution thus monitoring is not needed to prevent shirking by team members instead the role of monitoring is to discipline the monitor production is a collective enterprise by workers in a firm or firms in a joint venture the synergy that is the reason for the team s existence may mean that an individual s contribution to the team s output is not distinguishable so that it is impossible to pay him according to his own productivity how should the principal remunerate the team members so as to maximize his own profit in this paper we analyze incentives in teams with asymmetric information both adverse selection each member s ability is known only to himself and moral hazard effort cannot be observed directly holmstrom 1982 showed that in a team model with moral hazard the principal can ensure an outcome arbitrarily close to the full information ideal by using a contract that punishes each team member arbitrarily severely whenever team output falls below some target however this seems to be an unrealistically drastic way of solving the moral hazard problem in our model we in effect prevent the principal from using such a contract by introducing adverse selection in addition to moral hazard and by assuming that ability and effort interact in such a way that the principal is unable to disentangle an agent s effort from his ability under the assumption that the principal and the team members are risk neutral we shall show that the principal can implement his information constrained optimum simply by offering each agent a payment linear in the team s output although the essential feature of our analysis is the interaction between adverse selection and moral hazard this result can be understood by first considering the special case in which the agents abilities are common knowledge in this case the moral hazard problem can be completely solved the principal can do as well as he

desert and inequity aversion in teams teams are becoming increasingly important in work settings we develop a framework to study the strategic implications of a meritocratic notion of desert under which team members care about receiving what they feel they deserve team members nd it painful to receive less than their perceived entitlement while receiving more may induce pleasure or pain depending on whether preferences exhibit desert elation or desert guilt our notion of desert generalizes distributional concern models to situations in

clean evidence on peer effects we study subjects who were asked to fill letters into envelopes with a remuneration independent of output in the pair treatment two subjects worked at the same time in the same room and peer effects were possible in the single treatment subjects worked alone and peer effects were ruled out we find evidence of peer effects in the pair treatment because the standard deviations of output are smaller within pairs than between pairs moreover average output is higher in the pair treatment thus peer effects raise productivity finally low productivity workers are the most sensitive to the behavior of peers

language meaning and games a model of communication coordination and evolution language is a powerful coordination device we generalize the cheap talk approach to pre play communication by way of introducing a meaning cor respondence between messages and actions and by postulating two axioms met by natural languages players have a lexicographic preference second to material payoffs against deviating from the meaning correspondence under two sided communication in generic and symmetric n 3 n coordination games a nash equilibrium component in such a lexicographic communication game is evolutionarily stable if and only if it results in the unique pareto efficient out come of the underlying game we extend the analysis to one sided communica tion in arbitrary finite two player games jel c72 c73 z 3

group decision making theory and behavior under performance based water quality payments abstract two theoretical models explaining group allocation decisions under watershed level performance based payments are explored i reward and penalize individual contributors and ii reduce the problem with cost sharing and cooperative abatement under model i an optimal amount of pollution from individual contributors can be achieved with proper payment incentive and group allocation formula model ii represents a cost effective solution to pollution reduction where the group optimizes its return from group payments but does not necessarily achieve an optimal level of pollution field experiment observations support farmer behavior closer to model ii

the moral hazard of budget breaking it has recently been suggested in the agency literature that moral hazard in teams can be dealt with by introducing a third party who breaks the budget balancing constraint and that this facilitates the design of contracts that can sustain the pareto optimum as a perfect nash equilibrium this note offers an explanation for why the use of budget breaking schemes is not so widespread as that of active monitoring despite the fact that such schemes would save the resources expended on supervision the note demonstrates that allowing the budget to be broken introduces the potential for moral hazard on the part of the third party which could render the proposed equilibrium incredible

strategic incentives in teams implications of returns to scale this article demonstrates the critical relationship between the characteristics of the production function and the strategic incentives in a team equilibrium effort increases in team size when substitutability is low relative to returns to scale effort levels are actually strategic complements when returns to scale exceed the substitutability of members effort moreover even with equal shares the well known problem is determined by returns to scale and becomes worse as returns increase while a target scheme can support the optimal output level as an equilibrium it does not completely deter free riding a team member will accommodate shirking by increasing their own effort within a remarkably large accommodation zone where the additional effort cost is less than the bonus this accommodation of shirking by others exists for different returns to scale and even for very low levels of substitutability

using cost observation to regulate firms the paper emphasizes the use of accounting data in regulatory or procurement contracts when the supplier 1 has superior information about the cost of the project and 2 invests in cost reduction the main result states that under risk neutrality the supplier announces an expected cost and is given an incentive contract linear in cost overruns this optimal contract moves toward a fixed price contract as the announced cost decreases an investment choice is then introduced and the use of a rate of return regulation is studied

incentive effects of bonus taxes in a principal agent model several countries have implemented bonus taxes for corporate executives in response to the current financial crisis using a principal agent model this paper investigates the incentive effects of bonus taxes by analyzing the agent s and principal s behavior specifically we show how bonus taxes affect the agent s incentives to exert effort and the principal s decision regarding the composition of the compensation package fixed salary and bonus rate we find that surprisingly a bonus tax can increase the bonus rate and decrease the fixed salary if the agent is highly risk averse additionally a bonus tax can induce the principal to pay higher bonuses even though the agent s effort unambiguously decreases nevertheless a bonus tax reduces the overall salary of the agent further results are derived with respect to the existence and uniqueness of the equilibrium for a general effort cost function

deregulation and quality abstract this paper analyses within a static model the effect of quality concern on optimal market structure it focuses on cases where industry quality has public good like features and is not contractible it is shown that the introduction of competition raises a free rider problem which depresses quality the smaller producer free rides on its competitor investment which as a result underinvests to encourage the efficient producer to provide quality the regulator diminishes the market share of the opportunistic producer and chooses more often a monopoly however when quality is verifiable the introduction of competition entails no welfare loss whether the regulator observes total quality outcome or individual contributions

a theory of the optimal cost barrier to corporate takeovers this paper characterizes financial and employment contracts in the presence of both worker moral hazard and the threat of opportunistic takeovers firms in which worker efforts or specific investments are of greater importance are shown to exhibit a greater degree of deferred compensation supported by governance structures that allow managers to resist hostile takeovers more vigorously this effect is most pronounced in firms where workers pay for their job by accepting low wages early in their careers firms in which large deferred payments cannot be offset by low starting wages will offer less resistance to a hostile bidder copyright 1997 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

determinants of management compensation with risk averse agents and dispersed ownership of the firm abstract the salaries of top managers consist of two parts one part depending on profits the other being constant in a model of management compensation schemes with risk averse agents holmstrom and milgrom 1987 predict that an increasing variance in profits should reduce the profit relatedness of salaries using data from germany we show that indeed a larger variance of profits reduces the pay performance sensitivity moreover we analyze the relative influence of profits as compared to firm size on managerial compensation in general as well as the relationship between pay performance sensitivity and ownership structure

efficiency in sequential partnerships abstract we consider sequential partnerships in which agents obtain non verifiable information about the actions taken by previous agents for such partnerships a budget balanced sharing rule exists that induces efficient production the sharing rule has many desirable features 1 it uniquely implements efficient production 2 it does not rely on message games 3 it does not rely on unlimited liability and 4 it is robust to renegotiation the rule is furthermore simple intuitive and robust to sabotage coalition formation and noise it also induces efficient production when agents obtain incomplete information about previous actions journal of economic literature classificationnumbers d82 l23

start ups venture capitalists and the capital gains tax a model of start up finance with double moral hazard is proposed entrepreneurs have ideas and technical competence but lack own resources as well as commercial experience venture capitalists vcs provide start up finance and managerial support both types of agents thus jointly contribute to the firm s success but neither type s effort is verifiable we find that the market equilibrium is biased towards inefficiently low entrepreneurial effort and venture capital support in this situation the capital gains tax is particularly harmful the introduction of a small tax impairs effort and advice and leads to a first order welfare loss several other policies towards venture capital and start up entrepreneurship are also investigated

coordinating research through research joint ventures abstract in a simple model we show that a joint venture can implement the rates of investment that maximize joint profit when firms research abilities are private information this can be done with budget balance even though there are participation constraints there is no conflict between budget balance and participation constraints because firms payoffs can depend on ex post signals of abilities the conflict between budget balance and participation constraints is restored when both abilities and rates of investment are unobservable we give a condition under which the profit maximizing rates of investment can be implemented if we relax budget balance

managerial attributes and executive compensation we study the role of firm and manager specific heterogeneities in executive compensation we decompose the variation in executive compensation and find that time invariant firm and especially manager fixed effects explain a majority of the variation in executive pay we then show that in many settings it is important to include fixed effects to mitigate potential omitted variable bias furthermore we find that compensation fixed effects are significantly correlated with management styles i e manager fixed effects in corporate policies finally the method used in the article has a number of potential applications in financial economics the author 2011 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

aggregation and linearity in the provision of intertemporal incentives we consider the problem of providing incentives over time for an agent with constant absolute risk aversion the optimal compensation scheme is found to be a linear function of a vector of n accounts which count the number of times that each of the n kinds of observable events occurs the number n is independent of the number of time periods so the accounts may entail substantial aggregation in a continuous time version of the problem the agent controls the drift rate of a vector of accounts that is subject to frequent small random fluctuations the solution is as if the problem were the static one in which the agent controls only the mean of a multivariate normal distribution and the principal is constrained to use a linear compensation rule if the principal can observe only coarser linear aggregates such as revenues costs or profits the optimal compensation scheme is then a linear function of those aggregates the combination of exponential utility normal distributions and linear compensation schemes makes computations and comparative statics easy to do as we illustrate we interpret our linearity results as deriving in part from the richness of the agent s strategy space which makes it possible for the agent to undermine and exploit complicated nonlinear functions of the accounting aggregates

social norms and economic incentives in firms abstract this paper studies the interplay between economic incentives and social norms in firms we introduce a general framework to model social norms arguing that norms stem from agents desire for or peer pressure towards social efficiency in a simple model of team production we examine the interplay of three types of contracts with social norms we show that one and the same norm can be output increasing neutral or output decreasing depending on the contract multiplicity of equilibria and crowding out effects of steeper incentives can arise

dominant strategy implementation of bayesian incentive compatible allocation rules abstract a large literature on incentive mechanisms represents incentive constraints by the requirement that truthful reporting be a bayesian equilibrium this paper identifies mechanism design problems for which there is no loss in replacing bayesian incentive compatibility by the stronger requirement of dominant strategies we identify contexts where it is possible to change the transfer payments of an optimal bayesian mechanism so as to create dominant strategies and yet leave every participant s expected utility unchanged we also address the issue of multiple equilibria and unique implementation contexts where these results apply include auctions bilateral bargaining procurement contracting and intrafirm resource allocation

inequality and top income cyclicality abstract previous studies have shown that as top incomes became more concentrated over recent decades they also became more cyclical this paper derives an exact expression for top income cyclicality to show that it rises whenever average income growth tends to be captured by those at the top as it has over recent decades the increased cyclicality of top incomes may therefore be a reflection of their increased concentration rather than a distinct phenomenon in need of its own explanation

efficiency in partnerships we provide the necessary and sufficient condition for a partnership to be able to sustain efficiency when the output is stochastic when limited liability is imposed we show that only the level of the average liability of the partnership is important the individual levels of liability are irrelevant however the allocation of the total liability among the partners is crucial when additional conditions such as neutrality or individual rationality are imposed

ownership structure control type classifications and the performance of large british companies ownership structure among 470 u k listed companies is described by concentration indices and by control type the latter defined using both a fixed percentage shareholding and the degree of control the authors also test for possible controlling coalitions among groups of shareholders control type effects on performance are tested using reduced form equations for valuation ratio profit margin return on capital growth rates and directors pay there is no clear evidence to support managerial theories ownership structure is analyzed with the results that greater size and capital cost beta imply greater shareholding dispersion a probit model of control type gives weak results copyright 1991 by royal economic society

optimal contracts for teams a note on the results of mcafee and mcmillan in a team subject to adverse selection and moral hazard r p mcafee and j macmillan 1991 found surprisingly that under certain conditions the outcome is unaffected whether the principal observes only total output or whether the principal can observe each person s individual contribution to the production of the output this leads mcafee and macmillan to conclude that the purpose of monitoring is to discipline the monitor however when team members are risk averse the principal can benefit by monitoring copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

project characteristics incentives and team production we develop a model to show how agency conflicts free rider effects and monitoring costs interact to affect optimal team size and workers incentive contracts team size increases with project risk decreases with profitability and decreases with monitoring costs as a proportion of output our predictions are consistent with empirical evidence that firm specific risk has increased over time average corporate earnings have declined and firms organizational structures have also flattened the predicted effects of monitoring costs on team size are supported by evidence that improvements in information technology likely to lower monitoring costs lead to larger teams further firms with relatively more intangible assets where monitoring costs are likely to be higher are smaller optimal incentive intensities decrease with risk and increase with profitability the endogenous determination of team size accentuates the positive effects of a decline in risk and an increase in profitability on incentives

regulating multiple polluters deterrence and liability allocation we conisicler regulation of multiple polluters when inidividual emissions are uniobservable the tension between pollution deterrence and funding of remediation is examined under two constraints that penalty revenues fully fund remediation costs and that the regulator cannot make positive transfers to firms to isolate the effect of increasinig the niumber of polluters we compare an industiy consisting of a single large firm with one in which many small firms in aggregate mimic the large firm contrary to previous findings both the number of firms and the ability to monitor individual firms affect the welfare of a large class of regulators

efficiency and equilibria in complementary teams a comment abstract we argue that visile s 1994 claim that the moral hazard in the teams problem depends on the assumption that the inputs are perfect substitutes is incorrect discontinuities in the marginal product curves not complementarity of the inputs allows the moral hazard problem to be avoided in vislie s perfect complements example

efficient equilibrium selection in evolutionary games with random matching abstract this paper investigates the sensitivity of recent evolutionary models of learning to the specification of the matching mechanism we study a literally random matching mechanism combined with a process of strategy adjustment based on the realized average performance of each strategy in the key class of symmetric 2 2 coordination games the pareto efficient equilibrium per se is selected rather than the risk dominant equilibrium as the probability of experimentation or mutation goes to zero furthermore convergence to the equilibrium is relatively fast we extend these results for example to games of common interest journal of economic literature classification numbers c72 c73

social norms and welfare state dynamics the paper analyses the interaction between economic incentives and work norms in the context of social insurance if the work norm is endogenous in the sense that it is weaker when the population share of beneficiaries is higher then voters will choose less generous benefits than otherwise we also discuss welfare state dynamics when there is a time lag in the adjustment of the norm in response to changes in this population share and show how a temporary shift in the unemployment rate may cause persistence in the number of benefi

optimal incentives for teams much of the existing theory of incentives describes a static relationship that lasts for just one transaction this static assumption is not only unrealistic but the resulting predictions appear to be at odds with many work organizations the current paper introduces possible long term interaction among agents and studies how the design of explicit incentives and work organizations can exploit and interact with the implicit incentives generated by the repeated interaction of the agents the optimal incentive scheme is shown to display observed features of the increasingly popular teams such as the use of low powered group incentives