threat of dismissal incentive or sorting many people are fired from their jobs for poor performance however it is difficult to distinguish whether they are fired because they are not well suited for their job sorting explanation or because the firms are trying to provide incentives for effort incentive explanation this article develops a dynamic incentive model of dismissal and proposes a methodology to distinguish between these two explanations the methodology is based on learning by doing and changes in the slope of dismissal probability with respect to tenure using personnel data from a large u s company this study finds significant evidence for the incentive explanation

optimal design of pro conservation incentives abstract payments for environmental services pes schemes have become an increasingly accepted and popular mode for governmental and non governmental agencies to use in addressing local and regional declines in ecosystem services in pes schemes payments can either be tied to indicators of actions for service provision or to indicators of the generated service itself performance payments are synonymous for this second group i e payments are completely contingent on the procurement of an environmental good or service such a focus raises several practical issues during implementation we review and translate key aspects of the economic theory of incentives into the context of performance payment schemes with special attention paid to two practical issues risks outside the individual s control and distortion in the measurement of environmental services four different incentive payment approaches are presented and the effects of risk and distortion on optimal incentives are discussed the investigation of each payment approach is accompanied by a discussion of examples from the field

monitoring costs managerial ethics and corporate governance a modeling approach this article evaluates effectiveness and costs of external regulation in particular the sarbanes oxley act of 2002 sox in restricting managerial malfeasance and safeguarding shareholder interests it discusses the role of managerial ethics as an alternative corporate governance mechanism to protect shareholder value this article builds a mathematical model to illustrate shareholders choices of best corporate governance mechanisms taking into account the influence of managerial ethics effectiveness and costs of monitoring we suggest that the best corporate governance design and the optimal monitoring expenses are influenced by managerial types monitoring efficiency and effectiveness of ethics education we conclude that stringent regulation and monitoring may not always enhance shareholder value when managerial ethics could be improved by ethics education or social norms ethics education may be a better alternative than stringent regulation

uncertainty and incentives empirical work testing for a trade off between risk and incentives has had at best mixed success this article provides two simple reasons associated with subjectivity of performance appraisals why we might not expect to see any negative relationship both reasons relate to empirically observed problems associated with monitoring i supervisors sometimes bias their evaluations based on their personal feelings toward their subordinates and ii supervisors will sometimes offer evaluations that reduce their costs these aspects of monitoring are ignored in the standard model and can reverse the usual negative trade off between risk and incentives

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

the impact of geopolitical risks on travel and leisure stocks abstract the impact of geopolitical risks on tourism has not received scholarly attention in the existing literature previous studies focus on the effects of terrorism which is a subset of geopolitical risks our paper fills this gap and contributes to the literature by analyzing the vulnerability of four regional travel and leisure t l industry stock indices to geopolitical risks employing traditional and quantile regression techniques our results suggest a greater sensitivity of t l stock returns to geopolitical risks at times the industry performs poor except for asia pacific index that is the most resilient to geopolitical events we find that the negative effects of geopolitical risks are mostly driven by the threat of adverse geopolitical events only during period of falling t l stock prices however the realization of adverse geopolitical events significantly influences t l stocks at all times the results provide potential insights and implications for investors and tourism stakeholders

the tenuous relationship between effort and performance pay abstract when an agent is offered performance related pay the incentive effect is not only determined by the shape of the incentive contract but also by the probability of contract enforcement we show that weaker enforcement may reduce the agent s effort but lead to higher powered incentive contracts this creates a seemingly negative relationship between effort and performance pay

optimal incentive contracts in the presence of career concerns theory and evidence this paper studies optimal incentive contracts when workers have career concerns concerns about the effects of current performance on future compensation we show that the optimal compensation contract optimizes total incentives the combination of the implicit incentives from career concerns and the explicit incentives from the compensation contract thus the explicit incentives from the optimal compensation contract should be strongest for workers close to retirement because career concerns are weakest for these workers we find empirical support for this prediction in the relation between chief executive compensation and stock market performance

present or future incentives on the optimality of fixed wages with moral hazard abstract this paper uses a laboratory experiment to show that principals can defer all incentives for present effort to future payments and thus pay fixed wages and still motivate workers at the least cost whenever outcomes are observable this result contrasts with the prediction of the classical moral hazard model according to which future and present payments must be made contingent on present outcomes to induce effort at the least cost even though risk aversion cannot explain this result i estimate an expectation based reference dependent model to show that it is consistent with loss aversion

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

multidimensional heterogeneity and the economic importance of risk and matching evidence from contractual data and field experiments we measure the cost of risk and the benefits of matching heterogeneous workers to risk levels within a firm that pays its workers piece rates the workers of this firm are heterogeneous in two dimensions risk preferences and ability our results suggest that workers willingness to pay to avoid risk is heterogeneous it can attain 40 of their expected net earnings but averages to only 1 moreover the benefits to the firm of matching are relatively small profits are predicted to increase by only 2 3 4 if we restrict attention to cases where matching is possible although labor market sorting contributes to this result the workers in this firm are relatively risk tolerant it is not the primary cause more important is the relative homogeneity of risk conditions in this firm that give rise to limited opportunities for matching

incentive design under loss aversion compensation schemes often reward success b ut do not penalize failure fixed salaries with stock options or bonuses have this feature yet the standard principal agent model implies that pay is normally monotonically increasing in performance this paper shows that under loss aversion there will be intervals over which pay is insensitive to performance with the use of carrots but not sticks is frequently optimal especially when risk aversion is low and reference income is e ndogenous a further benefit of capping losses for example through options is to discourage reckless behavior by executives seeking to resurrect their fortunes jel f3 f4

an opposing responses test of classic versus market based promotion tournaments we use a systems based econometric method to show that classic and market based tournament models are empirically distinguishable since the role of risk differs across these models implementing the method using a large finnish worker firm matched panel we find support for classic tournaments given that promotions depend on relative performance the firm s wage structure is convex promotion probabilities are decreasing in the number of competitors performance is increasing in the wage spread and workers and firms adjust their choice variables in opposite directions when the variance of the stochastic component of worker performance changes

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

strategic behavior and marriage payments theory and evidence from senegal abstract this article proposes an original theory of marriage payments based on insights gained from firsthand information collected in the senegal river valley this theory postulates that decisions about the bride price which are made by the bride s father take into account the likely effects of the amount set on the risk of ill treatment of the wife and the risk of marriage failure based on a sequential game with three players the bride s father the husband and the wife and a matching process it leads to a number of important predictions that are tested against senegalese data relating to bride prices and various characteristics of women the empirical results confirm that parents behave strategically by keeping bride prices down so as to reduce the risk of marriage failure for their daughters other interesting effects on marriage payments and the probability of separation are also highlighted stressing the role of the bride s bargaining power in her own family

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

incentives equality and contract renegotiations theory and evidence in the chinese banking industry renegotiation plays an important role in contract theory but the empirical study of renegotiation is almost non existent in the literature using a unique dataset from the chinese banking industry we find that the large majority of managerial incentive contracts are renegotiated after performances are realized we develop a model of contract renegotiation where supervisors and managers sign incentive contracts and then renegotiate them in the unique equilibrium of the model incentive contracts are almost always renegotiated ex post even though renegotiation is fully anticipated incentive contracts affect performance the predictions of the model find strong support from our empirical results

contracting with self esteem concerns it is widely accepted in social psychology that the need to maintain and enhance self esteem is a fundamental human motive we incorporate this factor into an otherwise ordinary principal agent framework and examine its impact on the optimal incentive scheme and the agent s behavior especially focusing on the form of intrapersonal strategy known as self handicapping incorporating self esteem concerns into a contracting situation yields an implication that runs counter to conventional wisdom that is the standard tradeoff between risk and incentives may break down i e more uncertainty reduces agency cost and hence results in stronger incentives in the presence of self esteem concerns this is because uncertainty mitigates the need for self handicapping this result provides a possible reason for why we do not empirically observe this tradeoff in a robust manner we present an intuitive condition for this anomaly to arise and provide a set of testable implications the present framework also reveals why and how team production can be made more profitable by providing an explanation for the increasing popularity of team production finally this simple logic is applied to identify additional implications for the hidden costs of external enforcers such as evaluation and monitoring which are discussed extensively in social psychology

sorting incentives and risk preferences evidence from a field experiment abstract we conducted experiments within a firm to measure the risk preferences of workers who face substantial daily income risk we find that these workers are significantly more risk tolerant than individuals from the broader population this is consistent with sorting risk tolerant workers are attracted to high risk occupations

too much of a good incentive the case of executive stock options abstract using a utility maximization framework i show that the incentive to increase stock price does not always increase as more options are granted keeping the total cost of his compensation fixed granting more options creates greater incentives to increase stock price only if option wealth does not exceed a certain fraction of total wealth beyond this critical level granting more options actually reduces incentive effects and becomes counterproductive in addition stock options also create incentive to reduce increase idiosyncratic systematic risk these incentive effects are sensitive to the choice of exercise price

career concerns monetary incentives and job design we study optimal incentive contracts when commitments are limited and agents have multiple tasks and career concerns the agent s career concerns are determined by the outside market we show that the principal might want to give the strongest explicit incentives to agents far from retirement to account for the fact that career concerns might induce behavior in conflict with the principal s preferences furthermore we show that maximized welfare might be decreasing in the strength of career concerns that optimal incentives can be positively correlated with various measures of uncertainty and that career incentives have strong implications for optimal job design

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