why do labor contracts offer guaranteed annual wage increments an interesting feature of wage contracts for tenured academic staff in united kingdom universities is that they formally embody the principal that wages should increase with seniority individuals are hired at or near the bottom of a wage scale that has seventeen different wage levels each separated by approximately 5 once hired lecturers are guaranteed the right to move at least one step up this pay ladder each year of course this whole scale is renegotiated annually resulting in additional wage increases superimposed on the automatic increments many other u k public sector labor contracts employ a similar wage ladder for example those of civil servants local government employees school teachers and health service workers although employment of these groups is very secure contracts of university lecturers are particularly interesting because tenure guarantees to the individual over some range both increasing wages and future employment thus although the evidence for seniority wages from econometric studies has been mixed 1 2 we have in these contracts a clear cut case to explain and one with the additional wrinkle of guaranteed future employment in this paper we adopt an explicitly multi period framework in order to investigate guaranteed wage increments over time a critical feature of the model is the assumption that consumption is allocated across periods according to the life cycle hypothesis multi period contracts are therefore evaluated by the lifetime utility which they yield it should be emphasized that even for contracts where wage increments are guaranteed there still remains residual uncertainty about future earnings since the possibility exists that a worker may receive a better outside offer in section ii this uncertainty is motivated by incomplete search and in section iii by the fact that ability only becomes known after the first period of employment these essentially represent different interpretations of the same model the analysis of section ii assumes that all workers are offered a tenure contract and it is shown that seniority wages arise naturally in such a framework this in followed in section iii by a joint analysis of seniority wages and the firm s decision whether to offer a tenure contract in this case seniority wages can again arise and importantly tenure contracts can actually be more profitable for the firm than contracts with no tenure two

the efficiency of equity in organizational decision processes it is now widely accepted that rent seeking anne krueger 1974 or directly unproductive profit seeking jagdish bhagwati 1982 may cause inefficiencies in the context of public sector decisions the possibility that government decisions for example about taxes quotas franchises or standards may create or redistribute rents induces private parties to spend valuable resources to influence that distribution even when such expenditures carry no social benefit moreover the social cost of rent seeking can exceed the value of the resources spent trying to gain and protect rents for example because the fear of losing wealth through redistribution reduces the incentives for wealth creation treating rent seeking activities as characteristic of public sector decision processes ignores the fact that similar phenomena are to be found in firms unions and other private sector organizations our recent work milgrom 1988 our 1988 1990 papers attempts to identify the advantages of decision processes private or public that permit rent seeking and to incorporate these into a cost benefit analysis of optimal decision processes our work begins with an analysis of why rents and quasi rents arise in organizations and of the forms that the rent seeking they engender may take some measures to insulate the decision process from rent seeking such as limits on the provision of information by interested parties or restrictions on the range of options considered may degrade the quality of decisions especially by blocking the flow of valuable information optimal decision processes balance the costs of rent seeking against the value of information obtained several aspects of the rules affect the opportunities that members have to spend resources trying to alter the distribution of rents to ascertain the possibilities for rent seeking the analyst must ask questions like can the parties propose new initiatives at any time can they give volumes of testimony in a form of their own choosing can they appeal adverse decisions are decision makers obliged to respond to the parties initiatives is the range of actions that they can take in response relatively broad rather than being tightly constrained by property rights or other formal rules more affirmative answers to these questions lead to more opportunities or greater incentives for costly rent seeking as a kind of shorthand we call decision processes that have more of these elements more open processes the very elements that make a process open to rent seeking may also add flexibility and responsiveness helping to ensure that important ideas and proposals are fully considered from this perspective the benefits of openness can in principle be measured by a value of information calculation in the usual manner of statistical decision theory weighing the costs and benefits it follows that a more open process is more desirable when the rents available for redistribution are low and the value of the information that might be acquired is high conversely when the potential for redistribution is high and the value of information is low the optimal decision process is less open this kind of reasoning helps to illuminate the variations in the decision processes that are found in many organizations we have discussed a number of examples in our earlier work including the characteristics of personnel departments the contrasting patterns of decision making employment and compensation in u s and japanese firms professor of economics stanford university and jonathan b lovelace professor of economics graduate school of business stanford university stanford ca 94305 respectively this work was supported by the national science foundation

incentives and careers in academia theory and empirical analysis we study career concerns in italian academia we mould our empirical analysis on the standard model of contests formalised in the multi unit all pay auction the number of posts the number of app

standard promotion practices versus up or out contracts this article develops a theory concerning the choice between standard promotion practices and up or out contracts our theory is based on asymmetric learning and promotion incentives we find that firms employ up or out contracts when firm specific human capital is low and standard promotion practices when it is high we also find that if commitment to a wage floor is feasible and effort provision is important up or out is employed when low and high level jobs are similar these results are consistent with many of the settings in which up or out is typically observed such as law firms and academia

counteroffers and efficiency in labor markets with asymmetric information this article considers the effect of offer matching on labor market outcomes when the current employer has better information about his worker s productivity than potential employers previous research found that when current employers have better information than potential employers the latter use job assignment to infer an employed worker s qualifications as a result assignment of workers to jobs is inefficient i find that when current employers can match outside offers the equilibrium outcome may be efficient i analyze the effect of the asymmetric information on investment in human capital made by employers and workers and find these investment levels to be first best

managerial leverage is limited by the extent of the market hierarchies specialization and the utilization of lawyers human capital abstract this paper examines the role of hierarchies in the organization of human capital intensive production we develop an equilibrium model of hierarchical organization and provide empirical evidence based on confidential data on thousands of law offices the equilibrium assignment of individuals to hierarchical positions varies with the degree of field specialization which increases as the extent of the market increases as individuals knowledge becomes narrower but deeper managerial leverage the number of workers per manager optimally increases to exploit this depth consistent with our model the share of lawyers who work in hierarchies and the ratio of associates to partners increase as market size increases and lawyers field specialize other results provide evidence against alternative interpretations that emphasize unobserved differences in the distribution of demand or firm size effects and lend additional support to the view that in legal services hierarchies help exploit increasing re

do economics departments with lower tenure probabilities pay higher faculty salaries the simplest competitive labor market model asserts that if tenure is a desirable job characteristic for professors they should be willing to pay for it by accepting lower salaries conversely if an institution unilaterally reduces the probability that its assistant professors receive tenure it will have to pay higher salaries to attract new faculty our paper tests this theory using data on salary offers accepted by new assistant professors at economics departments in the united states during the 1974 75 to 1980 81 period along with data on the proportion of new ph d s hired by each department between 1970 and 1980 that received tenure in the department or at a comparable or higher quality department within the first eight years of receipt of their ph d s we find evidence that supports the hypothesis that a tradeoff existed equally importantly departments that offered low tenure probabilities to assistant professors also paid higher salaries to their tenured faculty we attribute this to low tenur

academic tenure posttenure effort and contractual damages i introduction in this article we explore the incentive properties of academic tenure relative to alternatives that might be substitutes for tenure we do not present a comprehensive theory of academic tenure but rather emphasize the role of tenure in providing an incentive for incumbent faculty to reveal the characteristics of recruits and to maintain their own posttenure performance academic tenure often implies that its holder cannot be removed from post except for good cause usually based on gross moral turpitude or gross incompetence mcpherson and schapiro 1999 such removal is historically characterized by a costly procedure governed by organizational or state statutes tepker 1993 our results suggest that tenure is just one of many mechanisms able to achieve honest revelation and that it has important interactions with other mechanisms there is no question that tenure is a constraint to administrators and limits the discretion of university managers the objective of our article is not to provide a new explanation for academic tenure but to show how tenure could in principle be replaced by contractual damages and how it more generally interacts with damages we believe it is worth theoretically exploring alternatives to tenure because universities appear to ignore tenure statutes on occasions in particular it is now common for schools to ignore orders to reinstate dismissed apparently tenured faculty and to choose to pay damages instead tepker 1993 carmichael s 1988 model suggests that damages can achieve efficient information revelation where the value of academics next best occupations are known a damages payment equal to the difference between current expected earnings and next best earnings that is restoring the victim s expectations ignoring nonpecuniary benefits for simplicity will then make an incumbent indifferent between remaining and being sacked and happy to reveal the skills of entrants carmichael rules out the payment of expectation damages and concentrates on the use of tenure which creates a requirement for specific performance by the university we contend that the frequent award of expectation damages by courts faced with cases of refusal to reinstate suggests that more attention should be given to the damages option 1 and indeed to possible interactions between tenure and its alternatives our contention is reinforced by the observation that many universities are currently softening tenure by introducing devices like five yearly reviews for tenured faculty note also that the role of tenure looms large once it has been awarded directing our attention toward a model of posttenure performance particularly if it could be lost possibly subject to the payment of contract damages our model explores the role of contractual damages in replacing academic tenure i e reinstatement as well as addressing the problem of revelation we depart from previous literature in considering that it is now common practice for university departments to use rankings and publication records to evaluate faculty thus reducing the asymmetry of information with respect to research and productivity detected by carmichael 1988 p 460 we focus on posttenure performance in the shadow of the threat of dismissal followed by payment of contract damages dnes and seaton 1998 2001 examine the reform of academic tenure in the united kingdom by the 1988 education reform act which allowed softer tenure to be chosen by universities 2 the authors tested the hypothesis that softening tenure encourages incumbent academics to consolidate their hold on academic life it seems that after 1988 the distinction between hard tenure and soft tenure universities persisted that is many british universities chose to continue operating a hard tenure system allowing softer tenure has not hindered the improvement of academic performance in the context of increased pressures from a research quality exercise that is periodically carried out by the higher education funding council

academic freedom private sector focus and the process of innovation we develop a model that clarifies the respective advantages and disadvantages of academic and private sector research rather than relying on lack of appropriability or spillovers to generate a rationale for academic research we emphasize control rights considerations and argue that the fundamental tradeoff between academia and the private sector is one of creative control versus focus by serving as a precommitment mechanism that allows scientists to freely pursue their own interests academia can be indispensable for early stage research at the same time the private sector s ability to direct scientists toward higher payoff activities makes it more attractive for later stage research

freedom of speech vs efficient regulation in markets for ideas abstract this paper seeks to explain the broad pattern of regulation repression of information in markets for ideas we consider four examples of ideas markets commercial advertising the courts considered as a market for truth scientific ideas and political speech since buyers cannot easily distinguish good from bad ideas these markets are prone to adverse selection so there is a case for repression in order to help these markets function a number of devices serve the regulatory function of screening bad ideas out of the markets considered advertising codes judicial codes scientific paradigms and constitutional restrictions on free speech however repression carries costs in that the set of regulations in any ideas market is itself an enforced monopoly this framework is used to explain a number of apparent anomalies in the actual regulation of different ideas markets it also yields a logical defence of freedom of speech in politics

job matching with finite horizon and risk aversion the consequences of introducing risk averse workers with a known finite retirement age into a simple job matching framework are explored the job matching model includes two jobs in the primary job workers and firms learn about the worker s productivity by observing his output over time in the secondary job productivity of any worker is known with certainty at the outset workers start off in the primary job but based on their observed performance may choose to switch to the secondary job the model is developed in two stages first the finite retirement age is introduced while the usual assumption of risk neutral workers is retained in this model it is shown that all workers who achieve at least a certain cumulative output record denoted r by a certain age denoted t will thereafter remain in the primary job until retirement those who do not achieve r by age t switch to the secondary job at or before age t and remain there second risk aversion is introduced along with finite retireme

phd job market professional trajectories and incentives during the phd abstract it is becoming more and more difficult for phd graduates to find a job corresponding to their qualifications stephan and levin have shown that this situation weakens the implicit contract between phd students or post doc and the research team in which they are doing their research this weakness of the implicit contract may slow down scientific production because of the lack of incentives for good students to participate in academic science production the aim of this paper is to examine incentives for students to invest in a phd and for phd supervisors to hire phd students after a theoretical analysis hypotheses are made these are tested by means of a survey on 400 engineering science phd students from the university of grenoble a medium sized town in france with a large academic community do students with a master s degree have relevant information about the scientific community and scientific rules to enable them to choose the best place to complete their phd what are the main factors determining their choice are trajectories flexible to what extent is their research affected by these variables in research do private firms and academia have the same criteria when it comes to recruiting phd graduates the analysis shows that trajectories are not flexible and that phd graduates have to choose a trajectory when their level of information is at its lowest when they choose their first job after completing their phd the cost of switching from academia to the private sector or vice versa depends on whether or not they collaborated with the private sector during their phd and on the intensity of publication the existence of two sectors of recruitment with two sets of criteria to evaluate applicants abilities can affect the implicit contract between phd graduates and phd supervisors and the dynamics of scientific production

incentives in academics why is there tenure this paper models ancademic department as an internal labor market the major problem facing the university administration is to ensure that members of its departments are willing to hire the best possible candidates academic tenure is seen to be a necessary condition for this the analysis is also consistent with other aspects of the academic environment including tenure track appointments contract buy outs early retirement plans and when a budget crunch hits the elimination of entire departments the results extend in a simple way to other organizations in which members have an input into overall decisions

pay equality and industrial politics personnel managers often argue that equitable pay treatment manifested as wage compression is useful because it reduces disharmony among workers but it is far from obvious that a compressed salary structure is morale improving since better workers may feel disenchanted by this scheme however when workers rewards are based on relative comparisons salary compression reduces uncooperative behavior that is detrimental to the firm relative comparisons imply that some reference group must be selected the major result is that within the relevant groups some wage compression is efficient

the provision of incentives in firms i ncentives are the essence of economics despite many wide ranging claims about their supposed importance there has been little empirical assessment of incentive provision for workers the purpose of this paper is to critically overview existing work on the provision of incentives since the interests of workers and their employers are not always aligned a large theoretical literature has emphasized how firms design compensation contracts to induce employees to operate in the firm s interest this literature has reached into many areas of compensation and has pointed to a multitude of different mechanisms that can be used to induce workers to act in the interests of their employers these include piece rates options discretionary bonuses promotions profit sharing efficiency wages deferred compensation and so on my objective here is to evaluate this literature in the light of a growing empirical literature on compensation where possible i will address the literature from two perspectives first an underlying assumption of this literature is that individuals respond to contracts that reward performance accordingly i consider whether agents behave in this way and whether these responses are always in the firm s interest second i address whether firms write contracts with these responses in mind in other words do contracts look like the predictions of the theory incentives are provided to workers

intrahousehold allocation and bargaining power evidence from chile abstract until 1999 children born out of wedlock in chile had fewer child support rights than those born to married couples i interpret a change in this law as an increase in the household bargaining power of women in cohabiting relationships using a panel of cross sectional data i find a decrease of 1 8 percentage points in the probability of working among men and an increase of 1 2 percentage points in school attendance of children under 19 these results provide evidence that contradicts the predictions of the unitary household model as well as the nash bargaining model the labor market outcomes support a model in which a reduction in men s relative bargaining power is understood as a tax on their wages

uncertainty task environment and organization design an empirical investigation the paper addresses two broad research questions 1 how do internal uncertainty associated with the task environment and external uncertainty arising from market volatility impact organization design 2 what are the relationships among various elements of organization design delegation of decision making incentives monitoring and internal labor market practices promotion training employment security we expand on prendergast 2002a who challenged the conventional view of a tradeoff between risk and incentives and build a single unified framework for answering our two research questions using a uniquely rich dataset that contains detailed information about the task environment of core employees and organization design at the individual group and firms levels in 530 minnesota firms in the mid 1990s we first find support for prendergast s key argument that internal uncertainty over which employees have control affects directly the allocation of decision making and only indirectly incentives via allocation of decision making this confirms similar findings by foss and laursen 2005 devaro and kurtulus 2010 and shi 2011 we also find that internal uncertainty has much impact on organization design through the choice of delegation of decision making at the employee level less so at the group level and very little at the firm level whereas external market uncertainty has little effect on organization design especially at the individual and group level decision making monitoring various internal labor market practices and incentives are strongly related to each other through substitution and complementarity

profit sharing and the role of professional partnerships when it is hard to assess service quality firms will suboptimally hire low ability workers we show that organizing as a profit sharing partnership can alleviate these problems our theory explains the relative scarcity of partnerships outside of professional service industries such as law accounting medicine investment banking architecture advertising and consulting it also sheds light on features of partnerships such as up or out promotion systems the use of noncompete clauses and recent trends in professional service industries

firm specific human capital amd optimal capital structure the authors consider the moral hazard in managers undersupplying imperfectly marketable firm specific human capital firms may cope by granting long term wage contracts that protect managers against employment termination although ex ante efficient these contracts may be ex post inefficient when managerial ability is discovered to be low precommitted firms must honor these contracts unless there is ownership transfer that permits their legal invalidation bankruptcy is one such transfer mechanism since managers anticipate the contractual consequence of bankruptcy leverage worsens moral hazard this cost provides a counterbalance to the debt tax shield and leads to an optimal capital structure copyright 1994 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

optimal design of peer review and self assessment schemes a principal must decide whether or not to implement a project that originated with one of her employees several employees have information about the quality of the project a successfully implemented project raises the inventor s chance of promotion at his peer s expense but a failed project ruins the inventor s career an employee who has a relatively good reputation and therefore is happy with the status quo must be encouraged to promote new ideas an employee who has a relatively bad reputation and therefore wants to change the status quo must be prevented from exaggerating the quality of new ideas we study incentive compatible and renegotiation proof mechanisms and we find that self assessment without any peer reports is optimal copyright 2001 by the rand corporation

labor economics and the psychology of organizations this essay is a discussion of how economists are attempting to understand institutions within the organizations of the labor market the institutions and issues discussed include mandatory retirement discontinuous jumps in wages pay compression rights of tenure up or out hierarchies timing of raises promotions and evaluations the existence of partnerships the use of bonuses vs penalties and pay as a motivator

the empirical content of nash bargained household behavior in households whose allocation decisions can be represented as nash bargained household decisions extrahousehold environmental parameters eeps serve as pure shifters of the threat points the comparative statics of changes in demands due to changes in these eeps are given these are incorporated into a comprehensive statement of the empirical content of nash bargained household behavior including a nash generalization of barten s 1966 fundamental matrix equation of the theory of consumer demand estimation and data requirements are discussed along with nested testing of the following structure the neoclassical model is nested in the nash bargained model which in turn is nested in an unrestricted model of household demands emphasized throughout is the enriched menu of explanatory variables for demand analysis provided by the nash model as well as the model s ability to jointly analyze i household formation and ii intrahousehold allocation decisions

tenure issues in higher education the system of tenure that dominates american higher education has long been a source of controversy the institution of tenure has been attacked for entrenching a lazy professoriate more interested in attending faraway conferences and producing unreadable research than in teaching or developing practical insights while on the other hand it has long been defended as an absolute necessity for the defense of open intellectual inquiry the tenure controversy has been sharpened in recent years by several events the end of mandatory retirement which was abolished by federal law effective january 1 1994 has heightened concerns about the productivity and commitment of professors who received tenure long ago and who no longer have the same incentives to invest in long term reputation there is also ongoing concern over the steadily rising cost of higher education which raises the question of what students as well as the taxpayers who support public institutions of higher education are getting for their money 1 the idea that tenure is a wasteful institution for universities runs up against the puzzling fact that the commitment to tenure is one that academic institutions impose on themselves although the american association of university professors aaup provides a powerful lobby in favor of tenure generally colleges and universities most notably private ones are under no legal requirement to observe tenure constraints although as administrators we certainly feel the weight of those constraints our view is that a tenure system in fact provides important benefits to society and to colleges and universities we argue here that the role of tenure is

do economists swing for the fences after tenure using a sample of all academics who pass through top 50 economics and finance departments from 1996 through 2014 we study whether the granting of tenure leads faculty to pursue riskier ideas we use the extreme tails of ex post citations as our measure of risk and find that both the number of publications and the portion consisting of home runs peak at tenure and fall steadily for a decade thereafter similar patterns hold for faculty at elite top 10 institutions and for faculty who take differing time to tenure we find the opposite pattern among poorly cited publications their numbers rise post tenure