the effects of human resource management practices on productivity a study of steel finishing lines the authors investigate the productivity effects of innovative employment practices using data from a sample of thirty six homogeneous steel production lines owned by seventeen companies the productivity regressions demonstrate that lines using a set of innovative work practices which include incentive pay teams flexible job assignments employment security and training achieve substantially higher levels of productivity than do lines with the more traditional approach which includes narrow job definitions strict work rules and hourly pay with close supervision their results are consistent with recent theoretical models which stress the importance of complementarities among work practices

an analysis of the relation between the stewardship and valuation roles of earnings in this paper we seek a deeper understanding of how accounting information is used for valuation and incentive contracting purposes we explore linkages between weights on earnings in compensation contracts and in stock price formation a distinction between the valuation and incentive contracting roles of earnings in paul 1992 produces the null hypothesis that valuation earnings coefficients vecs and compensation earnings coefficients cecs are unrelated our empirical analyses of the relations between earnings and both stock prices and executive compensation data at the firm and industry levels over the period 1971 2000 rejects paul s 1992 hypothesis of no relation we also document an increasing weight over time on other public performance information captured by stock returns in the determination of cash compensation specifically we find that the incentive coefficient on returns is significantly higher in the second of two equal sample subperiods relative to the incentive coefficient on earnings

communicating subjective evaluations consider managers evaluating their employees performances should managers justify their subjective evaluations suppose a manager s evaluation is private information justifying her evaluation is costly but limits the principal s scope for distorting her evaluation of the employee i show that the manager justifies her evaluation if and only if the employee s performance was poor the justification assures the employee that the manager has not distorted the evaluation downwards for good performance however the manager pays a constant high wage without justification the empirical literature demonstrates that subjective evaluations are lenient and discriminate poorly between good performance levels this pattern was attributed to biased managers i show that these effects occur in optimal contracts without any biased behavior

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

two sided uncertainty and up or out contracts a bilateral moral hazard problem provides a rationale for up or out employment contracts the employer sets a wage higher than opportunity cost to induce the worker to invest in firm specific capital if the individual does not make the grade it is in the firm s interest ex post to fire him had the initial arrangement not included provisions for firing individuals the firm would underreport the value of the employee wrecking the incentive scheme the basic model permits both firm and worker to be risk neutral therefore it admits a straightforward multiperiod extension which we also investigate

reaching for the stars who pays for talent in innovative industries innovative firms need to hire and motivate highly talented workers this article connects the potential returns to innovation to the structure of compensation for skilled employees we show that the software firms that operate in software sectors with high potential upside gains to innovation pay more to star workers than do other firms that operate in stable markets firms operating in product domains with highly skewed positive returns pay employees more in up front starting salaries and offer higher compensation growth the large estimated effects on earnings are robust to the inclusion of a wide range of controls for worker and firm characteristics

team theory garbage cans and real organizations some history and prospects of economic research on decision making in organizations this essay attempts to articulate and advance a long term agenda for organizational economics the essay begins with a general discussion of four specific items on this agenda and then moves to a more specific discussion of decision making in organizations beginning with two polar opposite conceptions team theory and garbage cans and then describing several recent economic models part of the rationale for writing this essay is that this agenda has both substantive and methodological commonalities with the work of james march copyright 2003 oxford university press

sectoral transformation and labour market flows in this chapter we examine the dynamics of adjustment in the labour market and in particular the movement of workers between industries it is often assumed that the speed with which the labour market must adjust has increased due to globalisation and or technological change if this is the case then these forces may be responsible for greater instability in the workplace the displacement of growing numbers of especially unskilled workers from declining sectors longer periods of unemployment and wage losses

optimal contracts for lenient supervisors we analyze optimal contracts in a hierarchy consisting of a principal a supervisor and an agent the supervisor is either neutral or altruistic towards the agent but his preferences are private information in a model with two supervisor types we find that the optimal contract may be very simple paying the supervisor a flat wage independent of his type and his evaluation of the agent s effort such a contract induces the neutral type of supervisor to report the agent s performance truthfully while the altruistic type reports favorably independent of performance accordingly overstated performance leniency bias may be the outcome of an optimal contract under informational asymmetries

setting efficient incentives for agricultural research lessons from principal agent theory a conceptual analysis of important issues in the organization and management of academic research is presented principal agent theory is applied to derive optimal compensation schemes for scientists when they differ in ability risk aversion cost of effort and reservation utility and to show the optimal trade off between institutional risk and scientists abilities implications for an efficient organization of research are derived including how scientists incentives should be structured to elicit optimal research efforts and direction whether research direction should be centralized or decentralized and whether the organization of research should be through external competitive grantsor program and institutional funding copyright 2000 oxford university press

an economic approach to influence activities in organizations members of organizations spend considerable time effort and ingenuity attempting to influence decision makers such influence activities may bring benefits to the organization but they also involve real costs this essay offers an economic rationale for such influence activity as representing rational self interested behavior in the presence of informational asymmetries and an analysis of how the design of the organization s structure and policies should respond to the incentives for attempting influence it is posited that information valuable for the organization s decision making is directly available only to members of the organization who have some personal stake in the decisions these individuals may then have an incentive to try to manipulate the information they develop and provide in order to influence the resulting decisions to their benefits this can be costly both in degrading the quality of decision making and in diverting the attention and effort of the organization s members from more productive activities the organization has three different methods it can employ to discourage excessive influence activities and to encourage more directly productive uses of time and effort it can limit access to decision makers and participation in decision making it can alter its decision making criteria to favor those performing well in productive activities and it can provide direct financial incentives to encourage the desired allocation of effort it is shown that an efficiently designed organization will use such financial incentives only as a last resort instead it will always first alter its decision participation policies and decisionmaking criteria

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

flexible pensions for politicians it may be difficult to motivate politicians in their last term to solve this problem we suggest a triple mechanism involving political information markets flexible pensions and democratic elections an information market is used to predict the potential reelection chances of the politician pensions depend on the price in the information market and thereby motivate the politician to act in a socially optimal manner we show that on balance the triple mechanism increases social welfare finally we suggest several ways to avoid the manipulation of information markets and we discuss possible pitfalls of flexible pensions

economic and psychological perspectives on ceo compensation a review and synthesis to many the principal agent model is the obvious lens through which executive pay should be viewed such a sentiment sits uncomfortably with a large number of empirical studies suggesting that the process of determining executive pay seems to be more readily explained by recourse to arguments of managerial power and influence this article investigates the micro underpinnings of boardroom behavior in order to explain this departure from principal agency theory s argument that executive compensation serves to align interests between the owners of the company and its senior managers we find that there are strong interaction effects among social influence variables and the social setting of boardroom activity generous pay awards bearing only a weak connection to corporate performance are explained in the context of the social psychology of the boardroom these results and a review of the empirical research suggest the need for a more comprehensive model of executive compensation that incorporates both economic and psychological determinants copyright 2010 the author 2010 published by oxford university press on behalf of associazione icc all rights reserved oxford university press

the gender gap in early career wage growth in the uk the gender pay gap on entry to the labour market is approximately zero but ten years after labour market entry there is a gender wage gap of almost 25 log points this article explores the reason for this gender gap in early career wage growth considering three main hypotheses human capital job shopping and psychological theories human capital factors can explain about 11 log points job shopping about 1 5 log points and the psychological theories up to 4 5 log points depending on the specification but a substantial unexplained gap remains women who have continuous full time employment have had no children and express no desire to have them earn about 8 log points less than equivalent men after 10 years in the labour market

job displacement and the transitions to re employment and early retirement for non employed older workers abstract despite the relatively higher frequency of job displacement among older workers in europe little is known about its effect on the work retirement decision employing individual data from the european community household panel for a number of countries with differences in their institutional environments the effect of job displacement for non employed workers is identified separately for the transitions into re employment and retirement the findings suggest that in countries with relatively more generous unemployment insurance provisions for the older unemployed which offer a pathway to early retirement older displaced workers exhibit lower re employment and higher retirement rates compared to the non displaced these results are robust to dynamic selection due to unobserved heterogeneity and to the endogeneity of displacement

implications of agency theory for optimal land tenure contracts explores landowner tenant contracts in land tenure in agriculture inefficiency of share tenancy relative to owner cultivation introduction of principal agent models influence of monitoring in studying optimal landowner tenant risk sharing need to study adequate tenant incentives this abstract was borrowed from another version of this item

incentives in organizations n 1975 steven kerr published on the folly of rewarding a while hoping for b the argument was simple you get what you pay for kerr distilled this unifying theme from a disparate set of examples involving politicians soldiers doctors orphanage directors professors and students as well as manufacturing and clerical employees and even human resource managers from these examples kerr pp 77980 concluded that two main causes of distorted incentives are fascination with an objective criterion where individuals seek to establish simple quantifiable standards against which to measure and reward performance and overemphasis on highly visible behaviors when some parts of the task are highly visible while others are not it took agency theory 15 years to express kerr s title not to mention to evaluate or extend his conclusions during this period agency theory was obsessed with the tradeoff between incentives and insurance even though clear eyed observations like kerr s about the design and performance of real incentive contracts suggested that several other issues are at least as important fortunately recent work has brought agency theory not only to kerr s position but beyond in this paper i summarize four new strands in agency theory that help me think about incentives in real organizations as a point of departure i begin with a quick sketch of the classic agency model i then discuss static models of objective performance measurement that sharpen kerr s argument repeated game models of subjective performance assessments incentives for skill development rather than simply for effort and incentive contracts between versus within organizations i con

modeling risk aversion in economics to capture the risk aversion intuition the standard approach in economics has been to utilize the model of expected utility in which risk aversion derives from diminishing marginal utility for wealth or diminishing marginal utility for aggregate consumption the expected utility model for risk aversion has been used to derive many important insights but over the years economists and psychologists have identified various problematic issues with expected utility as a descriptive model of choice in this article we urge economists to take seriously the research agenda of developing and assessing different ways to model risk aversion we proceed in three main steps first we highlight that the basic intuition of risk aversion that drives many results in economics is not intimately tied to expected utility second we describe a few alternative models that can also capture the basic intuition of risk aversion finally we discuss that while expected utility and the alternative models might all capture the basic intuition of risk aversion the alternative models can generate additional more nuanced implications not shared with expected utility that in some cases seem to be borne out by data we emphasize that these alternative models also are not perfect and further research is needed to identify even better approaches

identity and the economics of organizations on plebes first day at west point called r day they strip down to their underwear their hair is cut off they are put in uniform they then must address an older cadet with the proper salute and with the statement sir new cadet doe reports to the cadet in the red sash for the first time as ordered plebes must stand and salute and repeat and stand and salute and repeat until they get it exactly right all the while being reprimanded for every tiny mistake in the summary of david lipsky 2003 pp 145 154 who spent four years tracking a company of cadets at west point on r day you surrender your old self in stages but r day is just the beginning of the training and personal re engineering that is to come so that west point graduates emerge four years later as loyal officers in the u s army lipsky shows that despite some failure this tough program is remarkably successful in creating officers with the will to lead in battle economists current picture of organizations and work incentives has no place for the west point program and the motivations it seeks to inculcate in recruits in a standard economic model an individual s preferences are fixed and utility depends only on pecuniary variables the army s aim at west point is to change cadets preferences they wish to inculcate non economic motives in the cadets so that they have the same goals as the u s army alternatively stated the goal of west point is to change the identity of the cadets so they will think of themselves above all else as officers in the u s army they will feel bad about themselves they will lose utility if they fall short of the ideals of such an officer this change in identity

the threat from within account managers concern about opportunism by their own team members it is well known that transaction specific investments tsis made in customers by account managers makes them vulnerable to opportunism by customers i e the targets of the investments the present research shows that tsis made in customers by account managers can also lead them to be concerned about internal opportunism by nontargets of the investments e g information technology or finance specialists in their own teams furthermore it shows that concern about internal opportunism leads account managers to engage in internal blocking of their own team members i e restricting their access to customers and to customer information which results in lower performance with customers this phenomenon is a conundrum in that account managers interested in stronger performance with customers appear to block the very functional specialists who can help them attain better performance this research also identifies two types of continuities account manager customer continuity and specialist customer continuity that moderate the relationship between tsis and concern about internal opportunism building on the literature in economics and organization theory our research suggests that cross functional teams that are designed to bring different functional areas together are more complex to manage than previously believed this paper was accepted by pradeep chintagunta and preyas desai special issue editors this paper was accepted by pradeep chintagunta and preyas desai special issue editors

the existence of self enforcing implicit contracts implicit contracts are nontrivial nash equilibria to the post hiring trading game between a worker and the employer these are supported by intrafirm rather than labor market reputations the existence of an implicit contract that supports efficient trade is proved in a simple model

racial disparity in unemployment abstract in the united states black workers earn less than their white counterparts and have higher rates of unemployment empirical work indicates that most of this wage gap is accounted for by differences in cognitive skills that emerge at an early age in this paper we demonstrate that the same is not true for black white disparity in unemployment a large unexplained unemployment differential motivates the paper s second contribution a potential theoretical explanation this explanation is built around a model that embeds statistical discrimination into the subjective worker evaluation process that lies at the root of the efficiency wage theory of equilibrium unemployment

unemployment human capital depreciation and unemployment insurance policy summary this paper presents a structural estimation of a life cycle model with unemployment risk the model allows for human capital depreciation during unemployment it is estimated using german and us household level data the data suggest that the adverse impact of unemployment on individual productivity is important in both countries but quantitatively more relevant in germany moreover simulations show that the combination of skill depreciation with the generous unemployment insurance system that was in place in germany until recently is a key factor in explaining the differences in labour market performance between these countries copyright 2012 john wiley sons ltd

managerial incentive problems a dynamic perspective the paper studies how a person s concern for a future career may influence his or her incentives to put in effort or make decisions on the job in the model the person s productive abilities are revealed over time through observations of performance there are no explicit output contingent contracts but since the wage in each period is based on expected output and expected output depends on assessed ability an implicit contract links today s performance to future wages an incentive problem arises from the person s ability and desire to influence the learning process and therefore the wage process by taking unobserved actions that affect today s performance the fundamental incongruity in preferences is between the individual s concern for human capital returns and the firm s concern for financial returns the two need be only weakly related it is shown that career motives can be beneficial as well as detrimental depending on how well the two kinds of capital returns are aligned it is well understood by now that informational externalities may place special demands on the organization of economic exchange simple price mediated markets will frequently fail in the presence of asymmetric information in that case more elaborate contractual arrangements have to be used as substitutes for the price system lately considerable effort has been devoted to the analysis of contracting under incomplete information with the objective to understand the range of economic institutions that emerge in response to the failure of the price system the analysis of moral hazard has played a prominent role in this development moral hazard problems arise when for some reason or another transacting parties cannot contract contingent on the delivery of the good for instance in buying labour services it may be that the amount of labour supplied is not directly observable precluding a simple exchange of wage for labour as a partial remedy to this problem an imperfect mutually observed signal about the supply of labour can be used as a proxy in the contract frequently output is taken as such a proxy the drawback is that output is often influenced by other factors than labour input which induce undesirable risk into the contract one is therefore faced with a tradeoff between allocating risk associated with incomplete observability and providing incentives for a proper supply of labour gaining insight into this tradeoff is important not only for understanding contracting in the small e g managerial incentive schemes but also because it is closely related to the fundamental tension between equity and efficiency in the society as a whole while our understanding of moral hazard has advanced a lot in past years it is clear that much work remains an important question that has received little attention until

the welfare costs of worker displacement abstract recent work has documented the large persistent earnings losses associated with the displacement of high tenure workers in this paper we assess the welfare costs of this risk assuming that workers do not have access to insurance markets we find that the cost is substantial on the same order of magnitude as the cost associated with unemployment risk we also argue that long duration unemployment insurance is likely to exacerbate this cost and that government financed severance payments are a far more effective way of dealing with the displacement risk

earnings losses of displaced workers revisited recent literature reviews conclude that job displacement results in sustained earnings losses bruce c fallick 1996 lori g kletzer 1998 and that estimates of the size of those reductions vary with the type of data used in the analysis the industry within which displacement occurs and business cycle conditions the largest estimated losses were obtained using administrative data from pennsylvania during the 1970s and 1980s louis s jacobson robert j lalonde and daniel g sullivan 1993a the data covered a period of high unemployment in a heavily indus trialized state characterized by disproportionate job losses in manufacturing thus the ability to generalize those results to more favorable economic times and states with a greater reliance on service sector employment has been questioned to address these issues administrative data are used to similarly examine the impact of job displacement on earnings losses of workers in connecticut from 1993 to 2004 the work of jacobson lalonde and sullivan jls also provided important methodologi cal advancement by adapting analytical techniques developed for program evaluation james j heckman and v joseph hotz 1989 to the context of job displacement the same techniques fixed effects and time trend estimators as those used in the original jls publication are initially employed here then the methods are extended to include matching estimators developed since their publication both nearest neighbor estimators of average treatment on the treated att and differenced average treatment on the treated datt are adapted to the context of this study heckman hidehiko ichimura and petra todd 1997 heckman et al 1998 and rajeev h dehejia and sadek wahba 1999 2002 the results presented here for connecticut differ in some ways from those found in the work of jls using data from pennsylvania in the period immediately following job loss regardless of the technique employed earnings reductions for workers displaced through mass layoff range from 32 percent to 33 percent jls reported immediate losses of more than 40 percent six years later using the same estimators as jls earnings reductions in connecticut range from 13 percent to 15 percent they report sustained losses in pennsylvania of 25 percent the smaller long term impacts in connecticut demonstrate that under more ordinary economic times esti mated losses from administrative data lie within the range observed using other data sources this finding resolves a long standing conflict among the results of high quality studies that have used differing data sources to study earnings reductions following job loss 1 using two different matching estimators earnings losses six years after mass layoff are 12 percent the matching estimators compare those who experienced mass layoff to compari sons with the same ex ante probability of the event these smaller losses are consistent with the

how many winners are good to have on tournaments with sabotage abstract from an employer s perspective a tournament should induce agents to exert productive activities but refrain from destructive ones we experimentally test the predictive power of a tournament model which suggests that within a reasonable framework productive and destructive activities are influenced neither by the number of agents taking part in the tournament nor by the fraction of the winner prizes our results clearly confirm that sabotage in tournaments indeed occurs while tournament size has virtually no effect on behavior a balanced fraction of winner and loser prizes appears to enhance productive activities

urban shrinkage and resurgence in germany this article questions the strict parallelism of demographic and economic development in characterising urban shrinkage in germany as the cases of several ruhr cities and east german cities prove urban economic growth can be achieved thanks to the substantial presence of modern industries and business services and despite declines in population size serious shrinkages of halle cottbus and schwerin are primarily due to failures in the post industrial transformation process recent policy measures strongly oriented towards slowing the downsizing process of population via e g urban regeneration strategies do not appear to be sufficient for achieving urban resurgence in these cities more active industrial policy measures are required there to create a competitive high tech manufacturing sector to stimulate innovation activities and to boost its growth interdependence with modern local services and r d infrastructure

incentives between firms and within this paper reviews the significant progress in agency theory i e the economic theory of incentives during the 1990s with an eye toward applications to supply transactions i emphasize six recent models in three pairs 1 new foundations for the theory of incentive contracts 2 new directions in incentive theory and 3 new applications to supply transactions by reviewing these six models i hope to establish three things first the theory of incentive contracts needed and received new foundations second new directions in incentive theory teach us that incentive contracts are not the only source of incentives finally and especially relevant to supply transactions the integration decision is an instrument in the incentive problem

declining job security this article defines and analyzes job security in the context of implicit contracts designed to overcome incentive problems in the employment relationship contracts of this nature generate predictions concerning the relationship between job security parameters such as worker seniority and sectoral economic conditions and the probability of separations to test these predictions i estimate binomial and multinomial models of job separations using panel study of income dynamics psid data for the years 1976 93 the results are consistent with a decline over time in the incentives to maintain existing employment relationships for male workers and for skilled white collar women

unsecured debt with public insurance from bad to worse abstract in u s data income interruptions the receipt of public insurance and the incidence of personal bankruptcy are all closely related the central contribution of this paper is to evaluate bankruptcy protection and public insurance in a unified setting where each program alters incentives in the other our analysis delivers two striking conclusions first we find that u s personal bankruptcy law is an important barrier that prevents the public insurance system from improving welfare second contrary to popular belief we find that increases in the generosity of public insurance will lead to more not less bankruptcy

applicant screening and performance related outcomes a fundamental problem faced by employers is how to elicit effort from employees most economic models suggest that employers meet this challenge by monitoring employees carefully to prevent shirking but there is another option that relies on heterogeneity across employees and that is to screen job candidates to find workers with a stronger work ethic who require less monitoring we might therefore expect employers who screen candidates more intensively to monitor them less using data from a national sample of us employers we find that employers who screen applicants more intensively for factors that should predict work ethic also monitor employees less and also make greater use of systems such as teamwork where monitoring by supervisors is more difficult this screening is also associated with higher wages higher employee productivity and lower involuntary turnover rates screening for other attributes such as work experiences and academic performance does not produce these results jel codes m51 m54 j30

the contributions of the economics of information to twentieth century economics in the e eld of economics perhaps the most important break with the past one that leaves open huge areas for future work lies in the economics of information it is now recognized that information is imperfect obtaining information can be costly there are important asymmetries of information and the extent of information asymmetries is affected by actions of e rms and individuals this recognition deeply affects the understanding of wisdom inherited from the past such as the fundamental welfare theorem and some of the basic characterization of a market economy and provides explanations of economic and social phenomena that otherwise would be hard to understand i introduction the century coming to a close has seen vast changes in economics in both ideas and methodology upon ree ection it is remarkable however how many of the seeds of advances in this century were sowed in the previous i would argue that perhaps the most important break with the past one that leaves open huge areas for future work lies in the economics of information the recognition that information is imperfect that obtaining information can be costly that there are important asymmetries of information and that the extent of information asymmetries is affected by actions of e rms and individuals has had profound implications for the wisdom inherited from the past and has provided explanations of economic and social phenomena that otherwise would be hard to understand in this essay i wish to argue that information economics has had directly and indirectly a profound effect on how we think about economics today eighteenth and nineteenth century antecedents to be sure marshall and other nineteenth century economists talked about problems of imperfect information but with one exception discussions of information were obiter dicta caveats at the end of the analysis they were never at the center

of tournaments and temptations an analysis of managerial incentives in the mutual fund industry we test the hypothesis that when their compensation is linked to relative performance managers of investment portfolios likely to end up as losers will manipulate fund risk differently than those managing portfolios likely to be winners an empirical investigation of the performance of 334 growth oriented mutual funds during 1976 to 1991 demonstrates that mid year losers tend to increase fund volatility in the latter part of an annual assessment period to a greater extent than mid year winners furthermore we show that this effect became stronger as industry growth and investor awareness of fund performance increased over time

correlated income shocks and excess smoothness of consumption abstract in the literature econometricians typically assume that household income is the sum of a random walk permanent component and a transitory component with uncorrelated permanent and transitory shocks using data on realized individual incomes and individual expectations of future incomes from the survey of italian households income and wealth i find that permanent and transitory shocks are negatively correlated relaxing the assumption of no correlation between the shocks i explore the effects of correlated income shocks on the estimated consumption insurance against permanent and transitory shocks and consumption smoothness using a life cycle model with self insurance calibrated to u s data negatively correlated income shocks result in smoother consumption and upward biased estimates of the insurance against transitory and permanent when borrowing constraints are not tight income shocks while the life cycle model with negatively correlated shocks fits well the sensitivity of consumption to current income shocks observed in u s data it falls short of explaining the sensitivity of consumption to income shocks cumulated over a longer horizon

promotion rules and skill acquisition an experimental study standard economic theory identifies a trade off between up or stay and up or out promotion rules up or stay never wastes the skills of those not promoted but may provide insufficient incentives to invest in skills up or out can always induce investment in skill acquisition but may waste the skills of those not promoted the paper reports an experiment designed to study this trade off under up or out parties behave almost exactly as theory predicts but under up or stay and stay or stay results differ markedly from theoretical predictions in that case workers invest rather frequently although the prediction is that they would not these deviations can be explained by various reciprocity mechanisms

how destructive is creative destruction effects of job loss on job mobility withdrawal and income we analyze short and long term effects of worker displacement our sample consists of male workers displaced from norwegian manufacturing plants we find that displacement increases the probability of leaving the labor force by 31 the drop out rate from the labor force is particularly high in the first years following displacement the average earnings effects for those who remain in the labor force are moderate a 3 loss relative to non displaced workers after seven years splitting displaced workers on within and between firm movers we find that the estimated earnings loss is entirely driven by between firm movers who experience a 3 6 loss transfers to other plants within multi plant firms upon displacement are quite common our results support the view that human capital is partly firm specific and partly industry specific we find no evidence suggesting that human capital is plant specific

communication in repeated games with imperfect private monitoring this paper examines repeated games in which each player observes a private and imperfect signal on the actions played and in which players are allowed to communicate using public messages providing incentives for players to reveal their observations generates revelation constraints that combined with signal imperfections may be a source of inefficiencies however by delaying the revelation of their observations players may economize on the cost of deterring deviations and thereby avoid these inefficiencies because a player would not want to trigger a sanction that would penalize him too revelation constraints also tend to make sanctions difficult to enforce however with at least three players detecting deviations may not require that all the players reveal their observations in that case we obtain a nash threat version of the folk theorem with two players we do not obtain a similar result nevertheless we show that an efficient outcome can almost always be approximated

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

the role of promotion in inducing specific human capital acquisition workers routinely carry out activities that increase their productivity with their current employer for which they are not directly compensated for example a worker may be asked to develop relationships with clients or shop floor staff or he may develop a better understanding of how his firm operates firmspecific human capital of this type is difficult to quantify so that it is likely to be difficult to directly compensate the worker for its acquisition this paper is concerned with designing compensation schemes for employees to induce them to collect nonverifiable firm specific human capital if firms develop reputations for fairly compensating workers for skill collection the vagueness of these skills may not provide a significant incentive problem i consider the case where firms do not have the opportunity to develop reputations as a result the acquisition of human capital is subject to a dual moral hazard problem first noted in kahn and huberman 1988 first a worker only collects skills if there is a promise of a higher wage if he does so second the employer has an incentive to claim that the worker has not collected these skills even when he in fact has in order to save on wage costs so on the one hand it is difficult to repay the worker after skills are collected as the firm has an incentive to renege however the worker cannot be repaid before collecting skills as he has no subsequent incentive to collect them following the institutional literature i assume that the firm can commit to a labor contract which attaches wages to different tasks the principal purpose of the paper is to show that the firm can use this ability to commit to a wage scale for different tasks to induce a worker to collect firm specific human capital in the presence of this dual moral hazard problem where the worker is rewarded for skill acquisition by promotion to another job assume that a worker can be assigned to one of two jobs d and

vested interests and technology adoption this paper incorporates asymmetric interest group formation into a political economy model of barriers to technology adoption with many small industries coalitions of workers skilled in incumbent technologies lobby government for a prohibition on the adoption of superior technologies the model naturally generates concentrated benefits to vested interests and diused costs of barriers to technology adoption for reasonable parameter values this smallness of industry lobbies leads to barriers to the adoption of technologies that would make all workers more productive higher government corruption can lead to lower levels of tfp and per capita output the

an equilibrium search model when firms observe workers employment status this article considers an equilibrium search model where firms post wages using information on workers employment status earnings differentials between workers of different employment statuses are driven by firms ability to discriminate workers reservation wages i study how these wage policies depend on firms and workers characteristics and how these policies affect the wage distribution the model delivers new predictions for the amount of wage dispersion that can be generated with search models and provides a better representation of the left tail of the wage distribution in the presence of a legal minimum wage than standard equilibrium search models

the interrelated dynamics of unemployment and low wage employment this paper examines the extent of state dependence in unemployment and the role played in this by intervening low wage employment a range of dynamic random and fixed effects estimators are compared low wage employment is found to have almost as large an adverse effect as unemployment on future prospects and the difference in their effects is found to be insignificant evidence is presented that low wage jobs act as the main conduit for repeat unemployment and considerably increases its probability obtaining a higher wage job reduces the increased risk of repeat unemployment to insignificance

the locus of racial disadvantage in the labor market1 using a pooled sample constructed from recent installments of the displaced workers survey this study examines the racial disparities in postdisplacement outcomes while controlling for the predisplacement experience and earnings of individual workers it finds no racial difference in the reemployment wage but there is a large racial disparity in the chances of reemployment among workers with equivalent characteristics and experience this lower reemployment rate of displaced black workers may be due to individual differences in search behavior but it is also consistent with contemporary accounts of hiring discrimination

in the right place at the wrong time the role of firms and luck in young workers careers we examine administrative data on young german workers and their employers to study the long term effects of an early career job loss to account for nonrandom sorting of workers into firms with different turnover rates and for selective job mobility we use changes over time in firm and age specific labor demand as an instrument for displacement we find that wage losses of young job losers are initially 15 percent but drop to zero within five years only workers leaving very large establishments suffer persistent losses a comparison of estimators implies that initial sorting negative selection and voluntary job mobility biases ordinary least squares estimates toward finding permanent negative effects of early displacements

performance pay and teachers effort productivity and grading ethics this paper presents evidence about the effect of individual monetary incentives on english and math teachers in israel teachers were rewarded with cash bonuses for improving their students performance in high school matriculation exams the main identification strategy is based on measurement error in the assignment to treatment variable that produced a randomized treatment sample the incentives led to significant improvements in test taking rates conditional pass rates and mean test scores improvements were mediated through changes in teaching methods enhanced after school teaching and increased responsiveness to students needs no evidence was found of manipulation of test scores by teachers

incentives for lawyers moving away from eat what you kill the authors study an international law firm that changed its compensation plan for team leaders to address a multitasking problem team leaders were focusing their effort on billable hours and not spending sufficient time on leadership activities to build the firm compensation was changed to provide greater incentives for the leadership activities and weaker incentives for billable hours the effect of this change on the task allocation of the firm s team leaders was large and robust team leaders increased their non billable hours and shifted billable hours to team members the firm s new compensation plan combining an objective formula with subjective evaluations is the fastest growing compensation system among law firms today

reducing incremental costs associated with the delegation of incentive contracting decisions an analysis of planning and control decisions in a manufacturing setting in the presence of moral hazard abstract we compare and contrast two specific regimes involving the centralization and delegation of the incentive contracting decision in manufacturing organizations in the centralization regime a single individual simultaneously makes the allocation of demand to production facilities and determines the incentive compensation scheme for the managers at the facilities under the delegation regime the demand allocation is decided upon initially by a superior and the incentive contracting decision is subsequently made by a subordinate who is neither of the two managers in charge of the production facilities using the principal agent paradigm which assumes that the managerial efforts are unobservable we demonstrate that the centralization regime performs no worse than the delegation regime for situations where strategic or other requirements necessitate firms to opt for the delegation of the incentive contracting decision we propose a heuristic that significantly increases the likelihood of mimicking the allocation and contracting decisions made under the centralized regime

what should i be when i grow up occupations and unemployment over the life cycle abstract why is unemployment higher for younger individuals we address this question in a frictional model of the labor market that features learning about occupational fit in order to learn the occupation in which they are most productive workers sample occupations over their careers because young workers are more likely to be in matches that represent a poor occupational fit they spend more time in transition between occupations through this mechanism our model can replicate the observed age differences in unemployment which as in the data are due to differences in job separation rates

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

limited liability and incentive contracting with multiple projects i examine a principal agent model with multiple projects where a risk neutral manager is protected by limited liability the analysis has several interesting implications i incentive problems are shown to be a natural source of economies of scope as combining multiple projects under the management of a single manager relaxes the limited liability constraint ii as a result managers may be overloaded with work and exert inefficiently high effort and iii the analysis has implications for the optimal allocation of projects to different managers copyright 2001 by the rand corporation

where to go workers reasons to quit and intra vs interindustry job mobility we show that workers reasons for quitting their job affect their decision to stay in or leave their industry using survey data among public sector employees in the netherlands workers quitting for e g pay work pressure or job duties move relatively often to another industry in contrast to workers quitting for commuting time or the atmosphere at work this suggests that workers use their experience in the initial job to update their expectations on other jobs in the industry as the first set of job aspects is more likely to be related among jobs within an industry than the latter furthermore it is shown that workers reasons to quit fully explain the differences in wage growth between intra and interindustry job movers lastly we find that workers who quit for pay or management often leave the public sector altogether the data used in this article are proprietary

cowards and heroes group loyalty in the american civil war what motivated men to risk death in the most horrific war in u s history when pay was low and irregular and military punishment strategies were weak in such a situation creating group loyalty by promoting social capital is of paramount importance and in the civil war was the cement of both armies we find that individual and company socioeconomic and demographic characteristics ideology and morale were important predictors of group loyalty in the union army company characteristics were more important than ideology or morale soldiers in companies that were more homogeneous in ethnicity occupation and age were less likely to shirk

jobs jobs jobs a new perspective on protectionism this paper analyzes the determinants of protectionism in a small open economy with search frictions in this environment jobs generate rents whose access depends on the level of trade protection by raising the domestic price of a good a government may attract more firms in a particular industry this raises the probability that workers will find jobs in this sector and in turn will benefit from the associated rents though simple this channel may help explainavarietyofstylizedfactsonthestructureoftradeprotectionandindividualtrade policy preferences jel f130 f160

can private learn from public governance corporate governance is importantly based on agency theory and relies on extrinsic incentives to align the interests of managers employees and shareholders this article argues that in view of recent corporate scandals private governance can learn from public governance 1 goaloriented intrinsic motivation of agents should be supported by fixed incomes and an extensive selection process of employees 2 extrinsic but non monetary incentives e g conferring orders and titles can be used 3 the power of actors should be restricted by a clear division of power appropriate rules of succession and institutionalised competition for positions in firms

intertemporal incentives under loss aversion this paper studies the intertemporal allocation of incentives in a repeated moral hazard model with reference dependent preferences as in k oszegi and rabin 2009 besides consumption utility the agent experiences utility from the change in his beliefs about present and future eort and income when eort plans are rational the prospect of being disappointed by the outcome realization equals that of being pleasantly surprised and hence the loss averse agent is on net hurt by news in contrast to the prediction with classical preferences but consistent with real world contracts if consumption utility is not too concave and news about present income carries suciently larger weight in utility than news about future income a contract setting a current

the promise and pitfalls of using imprecise school accountability measures in recent years most states have constructed elaborate accountability systems using school level test scores however because the median elementary school contains only 69 children per grade level such measures are quite imprecise we evaluate the implications for school accountability systems for instance rewards or sanctions for schools with scores at either extreme primarily affect small schools and provide weak incentives to large ones nevertheless we conclude that accountability systems may be worthwhile even in states with aggressive financial incentives the marginal reward to schools for raising student performance is a small fraction of the potential labor market value for students

motivation and markets many workers receive pay based on subjectively assessed performance yet the shirking model of efficiency wages excludes it this paper incorporates such pay with the following results performance pay is more efficient than efficiency wages when the costs of having a job vacant are low and qualified workers in short supply more capital intensive industries pay more than less capital intensive industries as observed in studies of interindustry wages differentials sustaining an efficient outcome requires a social convention similar to the notion of a fair wage the model also makes predictions about the relationship between turnover wages growth and unemployment copyright 1998 by american economic association

motivation of politicians and long term policies we analyze the motivation of politicians in democracies when long term policies are socially desirable politicians receive utility from holding office and from the success of their projects we refer to the two extreme types of politicians as populists and policy success seekers one result is that inefficiencies in the political process are smaller when a politician is of the populist type when politicians offer incentive contracts the problem of inefficient decision making may be solved the amount of money necessary to induce the incumbent to undertake the socially optimal project decreases with the degree of populism he displays

performance pay and workplace injury panel evidence using panel survey data we show cross sectional evidence of an elevated risk of workplace injury for those paid piece rates and bonuses while consistent with adam smith s behavioural conjecture this could simply reflect sorting across workers or firms in response we successively control for a risk proxy for worker fixed effects and for worker with employer match fixed effects no previous examination has controlled for such fixed effects or examined us survey data the estimates indicate that injury risk increases substantially when blue collar manual workers become paid by piece rates and bonuses

occupational specificity of human capital we find that returns to occupational tenure are substantial everything else being constant 5 years of occupational tenure are associated with an increase in wages of 12 20 moreover when occupational experience is taken into account tenure with an industry or employer has relatively little importance in accounting for the wage one receives this finding is consistent with human capital being occupation specific

do monetary incentives undermine performance on intrinsically enjoyable tasks a field test economists have long been intrigued by an influential literature in psychology positing that monetary pay lowers performance on enjoyable tasks by crowding out agents intrinsic interest in them b

heterogeneous agents and uninsurable idiosyncratic employment shocks in a linearized dynamic general equilibrium model this paper proposes an analytical solution method for a dynamic general equilibrium model with heterogeneous agents and uninsurable idiosyncratic employment shocks the solution method yields an approximate balanced growth path which depends on the unemployment rate and the unemployment risk but which is independent of the ever changing wealth distribution

changes in job security and their causes an empirical analysis for france 1982 2002 abstract in this paper we analyze the changes in the risks of involuntary job loss in france between 1982 and 2002 we find that these risks are higher in the 1990s than they were in the 1980s we develop an econometric analysis to separate the effects of institutional changes from the effects of new technologies our estimates show that the rise in job loss rates is significantly more pronounced in industries that have the largest share of r d workers and the largest rate of new technologies users these findings suggest that technological changes contribute to decreasing the incentive to keep workers for long period of time and to increasing job insecurity

team incentives and performance evidence from a retail chain in a field experiment with a retail chain 1 300 employees 193 shops randomly selected sales teams received a bonus the bonus increases both sales and number of customers dealt with by 3 percent each dollar spent on the bonus generates 3 80 in sales and 2 10 in profit wages increase by 2 2 percent while inequality rises only moderately the analysis suggests effort complementarities to be important and the effectiveness of peer pressure in overcoming free riding to be limited after rolling out the bonus treatment and control shops performance converge suggesting long term stability of the treatment effect

unemployment risk and wage differentials workers in less secure jobs are often paid less than identical looking workers in more secure jobs we show that this lack of compensating differentials for unemployment risk can arise in equilibrium when all workers are identical and firms differ only in job security i e the probability that the worker is not sent into unemployment in a setting where workers search for new positions both on and off the job the worker s marginal willingness to pay for job security is endogenous increasing with the rent received by a worker in his job and depending on the behavior of all firms in the labor market we solve for the labor market equilibrium and find that wages increase with job security for at least all firms in the risky tail of the distribution of firm level unemployment risk unemployment becomes persistent for low wage and unemployed workers a seeming pattern of unemployment scarring created entirely by firm heterogeneity higher in the wage distribution workers can take wage cuts to move to more stable employment

sorting and incentive effects of pay for performance an experimental investigation agency theory highlights losses in productivity that may occur when the interests of owners and employees are imperfectly aligned pay for performance has been proposed as a solution to this proble

a theory of firm growth learning capability knowledge threshold and patterns of growth abstract this paper focuses on the dual role of r d knowledge generation and the technological competence enhancing effect of r d and its implication for the endogenous evolution of r d productivity and the pattern of firm growth in particular based on the evolution of firm specific r d productivity or technological competence this paper derives a simple r d based model of firm growth capable of explaining various aspects of firm growth the model proposes three prototype patterns of firm growth depending on both firm and industry specific characteristics the former includes firm specific technological competence enhancing capability and the initial level of technological knowledge and the latter includes industry specific r d appropriability specifically firms with low technological competence enhancing capability tend to follow a convergent growth pattern in which firm growth gradually declines while firms with high technological competence enhancing capability tend to exhibit either a sustained or a vicious growth pattern depending on the initial size of their technological knowledge stock an empirical analysis of unique data on firm growth and technological capability provides supportive evidence for the role of technological competence enhancing capability in conditioning the pattern of firm growth

it s about time implications of the period length in an equilibrium search model empirical evidence suggests that transitions between employment states are highly clustered around the first day of each workweek or month i analyze the effect of this phenomenon by presenting an equilibrium search model in which the period length is a parameter determining the degree of clustering infinitesimally short periods result in a continuous time model with bilateral meetings whereas longer time periods introduce the possibility of recall or simultaneity of job offers in this environment i show that the period length has a profound effect on equilibrium outcomes including the unemployment rate unemployment duration and the cross sectional wage distribution

the use of performance measures in incentive contracting the strength of incentives used in an organization and the productivity of employees that results from these incentives depend to a large degree on the characteristics of the performance measures available to the organization some employees work under high powered explicit incentive contracts while others have no explicit incentive contracts at all the ability of agency theory to predict the pattern of incentive provision in organizations has not been very impressive and the divergence between the prescriptions of agency theory and the actual practice of firms has been widely noted this paper along with both other papers in this session edward p lazear 2000 canice prendergast 2000 attempts to fill some of the gap between theory and practice i examine the characteristics of performance measures those data on which explicit incentive contracts are based to understand how firms use incentive contracting and to predict the use of incentives in practice