relative wealth concerns and entrepreneurship we develop a model of entrepreneurship in which market frictions limit the possibilities for diversifying entrepreneurial risk a concern for relative standing arises even though individuals consume only standard commodities in contrast to complete markets an increase in sector specific aggregate risk increases entrepreneurship due to relative wealth concerns a change in the profile of the economy to include more risk averse people results in an even greater increase in entrepreneurship thus relative wealth concerns mitigate the reduction in entrepreneurship arising from the non diversifiability of entrepreneurial risk we examine the effects of uncertainty about economic policies such as market based reforms on entrepreneurship

a multiplicative model of optimal ceo incentives in market equilibrium this paper presents a unified theory of both the level and sensitivity of pay in competitive market equilibrium by embedding a moral hazard problem into a talent assignment model by considering multiplicative specifications for the ceo s utility and production functions we generate a number of different results from traditional additive models first both the ceo s low fractional ownership the jensen murphy incentives measure and its negative relationship with firm size can be quantitatively reconciled with optimal contracting and thus need not reflect rent extraction second the dollar change in wealth for a percentage change in firm value divided by annual pay is independent of firm size and therefore a desirable empirical measure of incentives third incentive pay is effective at solving agency problems with multiplicative impacts on firm value such as strategy choice however additive issues such as perk consumption are best addressed through direct monitoring jel d2 d3 g34 j3

job matching in connected regional and occupational labour markets job mobility equilibrates disparities in local labour markets and influences the job matching efficiency we specify a matching function with regional occupational and combined regional occupation

how debt markets have malfunctioned in the crisis the financial crisis that began in 2007 is especially a crisis in debt markets a full understanding of what happened in the financial crisis requires investigation into the plumbing of debt markets during a financial crisis when funds often cannot be raised easily or quickly the fundamental values for certain assets can become separated for a time from market prices with consequences that can echo into the real economy this article will explain in concrete ways how debt markets can malfunction with deleterious consequences for the real economy after a quick overview of debt markets i discuss three areas that are crucial in all debt markets decisions risk capital and risk aversion repo financing and haircuts and counterparty risk in each of these areas feedback effects can arise so that less liquidity and a higher cost for finance can reinforce each other in a contagious spiral i will document the remarkable rise in the premium that investors placed on liquidity during the crisis next i will show how these issues caused debt markets to break down indeed fundamental values and market values seemed to diverge across several markets and products that were far removed from the toxic subprime mortgage assets at the root of the crisis finally i will discuss briefly four steps that the federal reserve took to ease the crisis and how each was geared to a specific systemic fault that arose during the crisis

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

funding liquidity and equity liquidity in the subprime crisis period evidence from the etf market using index and financial exchange traded funds etfs this study explores the relation between funding liquidity and equity liquidity during the subprime crisis period our empirical results show that a higher degree of funding illiquidity leads to an increase in bid ask spread and a reduction in both market depth and net buying imbalance such findings indicate that an increase in funding liquidity can improve equity liquidity with a stronger effect for the financial etfs than for the index etfs our study provides a better overall understanding of the effect of the liquidity supplier funding constraint during the subprime crisis period

management of bureaucrats and public service delivery evidence from the nigerian civil service we study how the management practices bureaucrats operate under relate to the quantity and quality of public services delivered we do so exploiting data from the nigerian civil service for 4700 public sector projects we have hand coded independent engineering assessments of project completion rates and delivered quality we supplement this with a survey eliciting management practices for bureaucrats in the 63 civil service organizations responsible for these projects building on bloom and van reenen 2007 management practices matter a one standard deviation increase in bureaucrat s autonomy signi cantly increases project completion rates by 18 a one standard deviation increase in practices related to incentives monitoring of bureaucrats signi cantly lowers project completion rates by 14 we show the negative impacts of incentive provision monitoring arise because bureaucrats multi task and incentives are poorly targeted and because these management practices capture elements of subjective performance evaluation that leave scope for dysfunctional responses from bureaucrats to support a causal interpretation of our ndings we document the determinants of management practices and examine channels through which organizations might endogenously adjust management practices our results provide novel insights into how changes in how bureaucrats are managed can have potentially large impacts on public service delivery in a developing country context jel classi cation j33 j38 o20

delegation and incentives this article analyzes the relation between authority and incentives it extends the standard principal agent model by a project selection stage in which the principal can either delegate the choice of project to the agent or keep the authority the agent s subsequent choice of effort depends both on monetary incentives and the selected project we find that the consideration of effort incentives makes the principal less likely to delegate the authority over projects to the agent in fact if the agent is protected by limited liability delegation is never optimal

an empirical analysis of risk incentives and the delegation of worker authority the authors empirically test prendergast s 2002 theory that incorporates the delegation of worker authority into the principal agent model to explain the lack of consistent empirical support for a tradeoff between risk and incentives using data from the 1998 british wers the authors investigate whether there is 1 evidence of a risk incentives tradeoff as predicted by the principal agent model 2 evidence of a positive relationship between incentive pay and the delegation of worker authority 3 evidence of a positive relationship between risk and authority 4 support for the main testable implication of prendergast s model namely that the evidence favoring a risk incentives tradeoff should strengthen when authority controls are added to the empirical model the answers are affirmative for all four questions thereby providing evidence clarifying the relationship between risk and incentive pay and how managers optimally bundle incentive pay and the delegation of worker decision rights to cope with

performance measurement expectancy and agency theory an experimental study theoretical analyses of optimal performance measures are typically performed within the realm of the linear agency model this model implies that for a given compensation scheme the agent s optimal effort is unrelated to the amount of noise in the performance measure in contrast expectancy theory as developed by psychologists predicts lower effort levels for noisier performance measures we conduct a real effort laboratory experiment and find that effort levels are invariant to changes in the distribution of the noise term i e to expectancy this suggests that enriching the economic linear agency model commonly applied within this area by including an expectancy parameter is not needed

lessons from the kibbutz on the equality incentives trade off the first kibbutz was established southwest of the sea of galilee in 1910 but the vast majority of kibbutzim were established in the 1930s and 1940s shortly before the creation of the state of israel in 1948 founders aimed to create a new human being who cared about the group more than about himself a homo sociologicus who would challenge the selfish homo economicus this idealistic view can explain many of the key features of kibbutzim equal sharing in the distribution of income no private property a noncash economy communal dining halls where members ate their meals together high provision of local public goods for use by kibbutz members separate communal residences for children outside their parents homes which were supposed to free women from their traditional role in society and allow them to be treated equally with men collective education to instill socialist and zionist values communal production whereby kibbutz members worked inside their kibbutzim in agriculture or in one of the kibbutz plants and no use of hired labor from outside kibbutzim because hiring labor was considered exploitation under the reigning socialist ideology to an economist steeped in thinking about incentives that self interested individuals face there are three reasons why an equal sharing arrangement of this sort seems unlikely to last first high ability members have an incentive to exit equal sharing arrangements to earn a wage premium so called brain drain second low ability individuals have an incentive to enter equal sharing arrangements so that they can be subsidized by more able individuals so called adverse selection third in context of equal sharing shirking and free riding are likely to be prevalent however kibbutzim have survived successfully for the past century and currently consist of 120 000 members living in 268 kibbutzim in a number of ways the kibbutzim offer an exceptional environment to examine the potential trade off between equality and incentives

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

trader leverage and liquidity does trader leverage drive equity market liquidity we use the unique features of the margin trading system in india to identify a causal relationship between traders ability to borrow and a stock s market liquidity to quantify the impact of trader leverage we employ a regression discontinuity design that exploits threshold rules that determine a stock s margin trading eligibility we find that liquidity is higher when stocks become eligible for margin trading and that this liquidity enhancement is driven by margin traders contrarian strategies consistent with downward liquidity spirals due to deleveraging we also find that this effect reverses during crises

an analysis of the use of accounting and market measures of performance in executive compensation contracts prior research has provided useful insights into the structure of compensation plans and their incentive effects however one important limitation of these studies is the virtual absence of any cross sectional analyses of the attributes of compensation contracts 2 this absence is related in part to the problems associated with controlling for other factors that affect compensation that is compensation contracts are

agency theory and franchising some empirical results this article provides an empirical assessment of various agency theoretic explanations for franchising including risk sharing one sided moral hazard and two sided moral hazard the empirical models use proxies for factors such as risk moral hazard and franchisors need for capital to explain both franchisors decisions about the terms of their contracts royalty rates and up front franchise fees and the extent to which they use franchising in this article i exploit several new sources of data on franchising to construct a cross section of 548 franchisors involved in various business activities in the united states in 1986 the data are most consistent with a model based on two sided moral hazard the empirical models are also more successful at explaining the extent to which franchisors choose to franchise stores than at explaining the terms of franchise contracts finally contrary to the predictions of several theoretical models i find that royalty rates and franchise fees are not negatively related

push or pull performance pay incentives and information we study a principal agent model wherein the agent is better informed of the prospects of the project and the project requires both an observable and unobservable input we show 1 performance pay may not be optimal even if output is the only informative signal of an essential input 2 total surplus tends to be higher if one input is unobservable than if both inputs are observable and 3 bunching may arise amongst low and intermediate types we explore the implications for push and pull programs used to encourage r d activity but our results have applications beyond this context

security design for a non standard ipo the case of spacs abstract a special purpose acquisition company spac is a public entity set up by a founder for the specific purpose of acquiring another firm typically a private firm the acquired firm is publicly traded after the acquisition and the acquisition in effect represents a non standard approach for the private firm to go public in this paper we develop a theoretical framework to explain several unique features of the spac design such as the prevalence of unit offerings and the use of equity and warrants in the founder s contract the founder in our model undertakes costly effort to learn about the characteristics of the acquisition target and delivers a good quality firm to the spac shareholders we show that the warrants play a unique role in limiting the level of risk of firms that the founder selects for acquisition we also show that the equity grant given to the spac founder pre commits the spac shareholders and firms to a pre determined level of underpricing for the non standard spac ipo process

the power of incentives variable pay is usually defined as pay that is tied to some measure of worker output the most typical form of variable pay historically was the piece rate which was more prevalent during the early part of the 20th century than it is at the beginning of the 21st there is a resurgence in variable pay particularly as it relates to executives whose pay is tied to output through some mechanism like stock options or bonuses that depend on individual or firm performance why use variable pay the typical reaction is that variable pay provides incentives to put forth effort although true discrete pay schemes also generate incentives much of the confusion in the literature results from the use of the terms high powered and low powered incentives which connote difference in ability to elicit worker effort it is more informative to make distinctions between discrete and continuous pay and between inputbased and output based pay 2 pay structures can be summarized by the following equation

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

uncertainty risk and incentives theory and evidence uncertainty has qualitatively different implications than risk in studying executive incentives we study the interplay between profitability uncertainty and moral hazard where profitability is multiplicative with managerial effort investors who face greater uncertainty desire faster learning and consequently offer higher managerial incentives to induce higher effort from the manager in contrast to the standard negative risk incentive trade off this learning by doing effect generates a positive relation between profitability uncertainty and incentives we document empirical support for this prediction this paper was accepted by wei jiang finance

imprecision in accounting measurement can it be value enhancing accounting measurements of firms investments are usually imprecise we study the economic consequences of such imprecision when it interacts with information asymmetry regarding an investment project s ex ante profitability known only by the firm s managers absent agency and risk sharing considerations we find that some degree of accounting imprecision could actually be value enhancing we characterize the optimal degree of imprecision and identify its key determinants the greater the information asymmetry regarding the project s profitability the greater is the imprecision that should be tolerated in the measurement of the firm s investment

optimal compensation and pay performance sensitivity in a continuous time principal agent model this paper studies the optimal contract between risk neutral shareholders and a constant relative risk aversion manager in a continuous time model several interesting results are obtained first the optimal compensation is increasing but concave in output value if the manager is more risk averse than a log utility manager second when the manager has a log utility a linear contract is optimal when there is no explicit lower bound on the compensation and an option contract is optimal when there is an explicit lower bound third optimal effort is stochastic state dependent fourth consistent with empirical findings and contrary to standard agency theory predictions the relationship between pay performance sensitivity and firm performance and that between pay performance sensitivity and firm risk can be nonmonotonic this paper was accepted by wei xiong finance

an empirical analysis of sales force compensation plans among the array of direct and indirect methods of motivation and control available to the sales manager is sales force compensation in this article the authors summarize theoretical predictions from the economics marketing finance and accounting literatures on the structure of optimal sales force compensation plans guided by these insights they then construct empirical models to quantify the effect of various sales force factors firm and product factors and market factors on compensation using data from 286 firms in 39 industries the authors examine determinants of incentive components and total pay and the optimal horizon for incentive pay copyright 1992 by university of chicago press

does product market competition lead firms to decentralize there is a widespread sense that over the last two decades firms have been decentralizing decisions to employees further down the managerial hierarchy economists have developed a range of theories to account for delegation but there is less empirical evidence especially across countries this has limited the ability to understand the phenomenon of decentralization to address the empirical lacuna we have developed a research program to measure the internal organization of firms including their decentralization decisions across a large range of industries and countries in this paper we investigate whether greater product market competition increases decentralization for example tougher competition may make local manager s information more valuable as delays to decisions become more costly since globalization and liberalization have increased the competitiveness of product markets one explanation for the trend towards decentralization could be increased competition of course there are a range of other factors that may also be at play including human capital information and communication technology culture and industrial composition to tackle these issues we collected detailed information on the internal organization of firms across nations the few datasets that exist are either from a single industry or at best across many firms in a single country we analyze data on almost 4 000 firms across twelve countries in europe north america and asia we find that competition does indeed seem to foster greater decentralization

integration of the sales force an empirical examination this article develops and tests a model of integration of a marketing function personal selling the model derived from transaction cost analysis as developed principally by williamson is formulated as a logistic function which is estimated with data from the electronic components industry as expected integration is associated with increasing levels of asset specificity difficulty of performance evaluation and the combination of these two factors contrary to the transaction cost model neither frequency of transactions nor interaction of specificity and environmental uncertainty is significantly related to integration the transaction cost model improves significantly upon the fit of a simple model relating integration to company size alone these results suggest that for studying transactions of this kind it is fruitful to view the firm as a governance structure

endogenous matching and the empirical determinants of contract form empirical work on contracts typically regresses contract choice on observed principal and agent characteristics if i some of these characteristics are unobserved or partially observed and ii there are incentives whereby particular types of agents end up contracting with particular types of principals estimated coefficients on the observed characteristics may be misleading we address this endogenous matching problem using a data set on agricultural contracts between landlords and tenants in early renaissance tuscany controlling for endogenous matching has an impact on parameters of interest and tenants risk aversion appears to have influenced contract choice

strategic incentives for innovations and market competition abstract we consider a principal agent model to provide a general analysis of how risk affects incentives of firms who invest in cost reducing r d and compete in the product market we specify the conditions under which higher risk reduces incentives of all firms we also examine the conditions under which an increase in risk may trigger opposite responses of rivals in the same industry some firms will strengthen while other firms will weaken the incentives provided to their agents this result holds regardless of the mode of competition in the product market cournot or bertrand as long as the rivals r d decisions are strategic substitutes it can generate new empirical implications and can provide an explanation for the lack of strong empirical support in the literature for a negative relationship between risk and incentives we also discuss policy implications regarding the effect of risk on the incentives to innovate and welfare

risk sharing vs incentives contract design under two sided heterogeneity we study the matching patterns between heterogeneous principals and agents in a principal agent model the resulting equilibrium relationship between risk and incentives could be negative positive or u shaped these results may provide an explanation for the absence of systematic empirical support for the standard risk model d 2005 elsevier b v all rights reserved

accounting measurement basis market mispricing and firm investment efficiency in this paper we investigate how the accounting measurement basis affects the capital market pricing of a firm s shares which in turn affects the efficiency of the firm s investment decisions we distinguish two broad bases for accounting measurements input based and output based accounting we argue that the structural difference in the two measurement bases leads to a systematic difference in the efficiency of the investment decisions in particular we show that an output based measure has a natural advantage in aligning investment incentives because of its comprehensiveness the first best investment is achieved when the output based measure is noiseless and manipulation free in addition under an output based measure more accounting noise manipulation always leads to more inefficient investment choices therefore if an output based accounting measure is highly noisy and easy to manipulate in practice the induced investment efficiency can be quite low on the other hand an input based accounting measure while not as comprehensive may induce more efficient investment decisions than an output based measure if some noise is unavoidable in either measure the reason is twofold first input based measures may be associated with less noise and limited manipulation in practice second and more importantly we show that under

franchising and risk management franchising is an important and controversial form of vertical integration allegations of opportunistic behavior by franchisors have led to calls for public regulation and in some states fairness in franchising laws the advisability of such regulation depends on the long run incentives to franchise if franchising is a temporary step on the path to complete ownership integration regulation may be called for alternatively if complete or partial franchising is a permanen t market solution regulation is at least contestable this paper offer s new evidence on the incentives to franchise copyright 1988 by american economic association

franchising agency problems and the cost of capital explanations for franchising are examined in the context of the us hotel industry the study is distinct from previous research on franchising because it explicitly recognizes the existence of three organizational forms whereas previous research has focused exclusively on two of these three forms the two organizational forms examined in previous work are franchising and company ownership the additional organizational form is company management investor ownership which involves management by the franchisor and ownership by outside investor groups a plausible explanation for the existence of the last organizational form is based on the availability of low cost capital from non chain sources

university knowledge transfer private ownership incentives and local development objectives abstract we study the impact of private ownership incentive pay and local development objectives on university licensing performance we develop and test a simple contracting model of technology licensing offices using new survey information together with panel data on u s universities for 1995 99 we find that private universities are much more likely to adopt incentive pay than public ones but that ownership does not affect licensing performance conditional on the use of incentive pay adopting incentive pay is associated with about 30 40 percent more income per license universities with strong local development objectives generate about 30 percent less income per license but are more likely to license to local in state start up companies in addition we show that government constraints on university licensing activity are costly in terms of forgone license income and the creation of start up companies these results are robust to controls for observed and unobserved heterogeneity

dynamic resource allocation with hidden volatility abstract we study a firm s internal resource allocation using a dynamic principal agent model with endogenous cash flow volatility the principal supplies the agent with resources for productive use but the agent has private control over both project volatility and resource intensity and may misallocate resources to obtain private benefits the optimal contract can yield either overly risky or overly prudent project selection it can be implemented with a constant pricing schedule i e a static decentralized linear mechanism giving the agent control over the resource quantities project risk and agent s equity share the implementation rationalizes the use of hurdle rates above a firm s cost of capital and transfer prices above marginal cost while showing that hurdle rates or transfer prices may not vary with the agent s risk choice

evidence on performance pay and risk aversion abstract making use of a unique representative data set we find clear evidence that risk aversion has a highly significant and substantial negative impact on the probability that an employee s pay is performance contingent which confirms the well known risk incentive trade off

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

wealth and executive compensation using new data on the wealth of swedish ceos i show that higher wealth ceos receive stronger incentives since high wealth excluding own firm holdings implies low absolute risk aversion this is consistent with a risk aversion explanation to examine whether wealth is likely to proxy for power i use lagged wealth typically measured before the ceo was hired and the results remain for one of two incentive measures also the wealth incentive result is not stronger for ceos likely to face limited owner oversight finally wealth is unrelated to pay levels and is hence unlikely to proxy for skill the compensation of chief executives of large listed companies is often largely in the form of risky instruments such as shares and options since share prices are affected by many factors outside management control this exposes ceos to risk according to standard agency theory the risk inherent in incentive compensation should reduce optimal incentives looking across firms the evidence that volatile stock prices reduce incentives in actual compensation has been mixed see e g aggarwal and samwick 1999 core and guay 2001 and prendergast 2002 for different views the importance of risk for incentives is thus in dispute 1 this paper takes another look at ceo incentives exploiting variation in risk aversion rather than risk decreasing absolute risk aversion implies that a wealthy ceo is less risk averse than a similar same coefficient of relative risk aversion but less wealthy ceo wealth should therefore proxy for risk aversion wealth may also be related to ceo skill and power obviously using wealth variation empirically hinges on having adequate data on individual wealth i use swedish tax filings to construct a proxy of wealth in sweden tax authorities provide data on aggregate yearly income

salaries or piece rates on the endogenous matching of harvest workers and crops the objective of this paper is to determine whether the choice of payment schemes hourly vs piece rates is systematically related to the workers risk aversion and ability we derive the equilibrium relationship between agents risk aversion and ability and the power of incentives payment scheme in a market where many heterogeneous principals and agents are endogenously matched the equilibrium matching between principals and agents depends on the traits and is critical in determining the contract choice using confidential data from the national agricultural workers survey naws we find evidence of matching between agricultural workers and the riskiness of their jobs crops they harvest based on workers risk aversion and no matching based on ability when controlling for matching we find strong evidence that high risk averse workers choose hourly rates and low risk averse workers choose piece rates we also found that high ability types choose piece rates and low ability types choose hourly rates but the evidence is weaker jel j33 d82 q12

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

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

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

the tenuous trade off between risk and incentives empirical work testing for a negative trade off between risk and incentives has not had much success the data suggest a positive relationship between measures of uncertainty and incentives rather than the posited negative trade off i argue that the existing literature fails to account for an important effect of uncertainty on incentives through the allocation of responsibility to employees when workers operate in certain settings firms are content to assign tasks to workers and monitor their inputs by contrast when the situation is more uncertain they delegate responsibility to workers but to constrain their discretion base compensation on observed output

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

do mispricing and financial constraints matter for investment decisions this study investigates how mispricing and financing constraints affect rms future capital investments we find that when the financing constraints are high overpriced underpriced firms invest

supply chain performance under market valuation an operational approach to restore efficiency based on a supply chain framework we study the stocking decision of a downstream buyer who receives private demand information and has the incentive to influence her capital market valuation we first characterize a market equilibrium under a general single buyback contract we show that the buyer s stocking decision can be distorted in equilibrium such a downstream stocking distortion hurts the buyer firm s own performance and it also influences the performances of the supplier and the supply chain we further reveal scenarios where full supply chain efficiency cannot be reached under any single buyback contract then focusing on contract design we characterize conditions under which a menu of buyback contracts can prevent downstream stocking distortion and restore full efficiency in the supply chain our study demonstrates that in a supply chain context a firm s incentive to undertake real economic activities to influence capital market valuation can potentially be resolved through operational means this paper was accepted by yossi aviv operations management

firms choice of method of pay using data from the bls industry wage survey the author tests the theory that firms choose their methods of pay by balancing the gains from more precise links between performance and pay against m

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

the role of risk and transaction costs in contract design evidence from farmland lease contracts in u s agriculture the objective of this article is to provide new empirical evidence on landlord tenant choices of share versus cash rent contracts in u s agriculture the focus is on the contribution of explanatory variables that represent transaction costs risk sharing incentives or both an empirical model of contract choice is tested against the 1999 agricultural economics and land ownership survey aelos and finds mixed evidence for low transaction cost and risk sharing incentive motives for landlord tenant choices of a share versus cash rent contract however the behavior of landlords and tenants is consistent with them being risk averse although it is standard to control for the riskiness of the principal s task that is contracted we find that other attributes of the landlord are an important part of a relatively complex story for u s land tenancy contacting the latter results have generally been ignored in other published landlord tenant contracting studies

testing agency theory with entrepreneur effort and wealth we develop a principal agent model in an entrepreneurial setting and test the model s predictions using unique data on entrepreneurial effort and wealth in privately held firms accounting for unobserved firm heterogeneity using instrumental variables techniques we find that entrepreneurial ownership shares increase with outside wealth and decrease with firm risk effort increases with ownership and effort increases firm performance the magnitude of the effects in the cross section of firms suggests that agency costs may help explain why entrepreneurs concentrate large fractions of their wealth in firm equity

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

an empirical look at franchising as an organizational form franchise contracts are identified as a hybrid form of economic organization motives for the dominance of franchise arrangements are identified by examining the theoretical literature on franchising and related literatures on the theory of the firm firm growth managerial and employee selection a nd brand name capital empirical tests are performed on the incidence of franchise contracts across states for three industries in which f ranchising is prominent and data are readily available the results s uggest that both principal agent incentives and informational incenti ves favor the use of franchise arrangements copyright 1988 by the university of chicago

affiliation integration and information ownership incentives and industry structure this paper presents theory and evidence on horizontal industry structure at issue is the question what makes industries necessarily fragmented the theoretical model examines trade offs associated with affiliation and integration and how they are affected by the contracting environment i show how contractual incompleteness can lead industries to be necessarily fragmented i also show that contractual improvements will tend to lead to a greater concentration of brands but whether they lead industries to be more or less concentrated depends on what becomes contractible i then discuss the propositions generated by the model through a series of case study examples i introduction two core theoretical literatures underlie much of the field of industrial organization theories of industry structure and theories of the firm although the issues these literatures emphasize are very different they actually seek to explain the same thing theories of industry structure are in a way also theories of firms boundaries likewise theories of firms boundaries can also be read as theories of industry structure these literatures have different strengths and weaknesses the industry structure literature provides several good explanations for why industries might be necessarily concentrated the traditional literature bain 1956 scherer 1980 emphasizes factors such as scale economies market size and entry barriers the newer literature adds concepts such as heterogeneity in tastes the strength of price competition and consumers sensitivity to sunk expenditures such as advertising spence 1976 dixit and stiglitz 1977 salop 1979 sutton 1991 but most industries are fragmentedfmost of their output is produced by small independently owned firmsfparticularly those in the service and retail sectors 1 as i describe in more detail

portfolio choice and pricing in illiquid markets abstract this paper studies portfolio choice and pricing in markets in which immediate trading may be impossible it departs from the literature by removing restrictions on asset holdings and finds that optimal positions depend significantly and naturally on liquidity when expected future liquidity is high agents take more extreme positions given that they do not have to hold those positions for long when they become undesirable consequently larger trades should be observed in markets with more frequent trading liquidity need not affect the price significantly however because liquidity has offsetting impacts on different agents demands this result highlights the importance of unrestricted portfolio choice the paper draws parallels with the transaction cost literature and clarifies the relationship between the price level and the realized trading frequency in this literature

determinants of the introduction of stock options by japanese firms analysis from the incentive and selection perspectives this paper examines the determinants of the introduction of stock options in japan in response to their deregulation from the incentive and selection perspectives younger firms use broad based stock options more often even after controlling firm size growth and the possibility of a liquidity constraint moreover stock price volatility increases the adoption of stock options only when a firm is young these results support the relevancy of a selection view that focuses on efficient project choice stock options are used more often by fast growing firms and less in regulated industries and by the firms with concentrated ownership structure consistent with both views

organizational choices and performance in distribution systems this article studies the performance of distribution networks as the result of a range of organizational choices the analytical part of the article surveys the vast literature devoted to franchising and dual distribution from this framework several testable propositions linking network performance to organizational choices are derived three complementary criteria of performance are taken into account the internationalization rate the expansion rate and the market share this article provides evidence for the simultaneity between these performance criteria analytically related as indicators of the network commercial performance thus the econometrical model is defined as a system of simultaneous equations free of endogeneity regarding the explanatory variables the estimations on recent french data obtained using the three stage least squares method provide robust results and show that the type of distribution network the number of company owned outlets in the network the type of sector and the

the choice of organizational form the case of franchising abstract we examine companies that franchise some units and centrally operate own others the agency problems confronting these two organizational forms are analyzed testable hypotheses are developed the empirical results support the notion that owning versus franchising reflects a trade off among agency related problems the cost of monitoring store managers appears to be especially important in the own franchise decision the level of repeat business and initial investment requirements per unit also appear to be important

liquidity and risk management this paper provides a model of the interaction between risk management practices and market liquidity on one hand tighter risk management reduces the maximum position an institution can take thus the amount of liquidity it can offer to the market on the other hand risk managers can take into account that lower liquidity amplifies the effective risk of a position by lengthening the time it takes to sell it the main result of the paper is that a feedback effect can arise tighter risk management reduces liquidity which in turn leads to tighter risk management etc this can help explain sudden drops in liquidity and since liquidity is priced in prices in connection with increased volatility or decreased risk bearing capacity this abstract was borrowed from another version of this item

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

aggregate job matching and returns to scale in germany abstract it is found that in 1984 the german matching function shifted from increasing to constant or even decreasing returns to scale such a regime shift is consistent with a move from a multiple equilibria environment to a single equilibrium state where policies lose effectiveness

an empirical analysis of a firm s decision to franchise abstract hypotheses from monitoring and search cost explanations for the existence of franchising are discussed and tested the evidence offers strong support for the search theory somewhat weaker support for the monitoring shirking theory and no support for the monitoring cheating hypothesis

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

governance and contract choice theory and evidence from groundwater irrigation markets abstract this paper examines the role governance institutions play in the adoption of contracts we develop a simple model of the contracting relationship in a setting where unverifiable outcomes exist and use it to interpret data on groundwater irrigation contracts in bangladesh a distinguishing feature of this market is the variety of village level institutions which impose different degrees of punishment for contract violation consistent with the model we find households adopt contracts that rely on unverifiable outcomes which are not formally contractible when punishment for contract violation is weak conversely households adopt contracts that rely on formally contractible and verifiable outcomes when punishment is severe this evidence is consistent with contract terms being chosen optimally given what is or is not formally contractible

the estimation of frictional unemployment a stochastic frontier approach this paper reports an estimate of the frictional unemployment rate in u s manufacturing that is derived from a parametric statistical method for estimating stochastic frontiers the steady state perfect foresight solution to an estimated employment growth frontier provides a locus of technically efficient frictional rates of unemployment the mean frictional unemployment rate during the sample period is estimated to be 3 7 percent of the manufacturing labor force this estimate conforms closely to an estimate of 3 5 percent that is derived from manufacturing sector data presented by david m lilien 1980 for roughly the same time period copyright 1991 by mit press

pigouvian taxation under double moral hazard abstract many notable pollution problems occur in industries where production is carried out under vertical contractual arrangements that are characterized by conditions of double moral hazard in this paper we derive optimum pollution taxes under such conditions in contrast to situations characterized by full information we show that imposing a pigouvian tax equal to the marginal cost of pollution on either the upstream or the downstream agent or the industry as a whole does not lead to the first best level of pollution on the contrary the industry should pay for less than the full cost of environmental damage in addition we find that under conditions of double moral hazard both agents should be taxed this is because imposition of a tax in this setting affects equilibrium contract terms and the incentives that each agent faces at the margin thus imposing the tax on one agent alone cannot replicate the optimum

managerial expertise private information and pay performance sensitivity this paper characterizes optimal pay performance sensitivities of compensation contracts for managers who have private information about their skills and those skills affect their outside employment opportunities the model presumes that the rate at which a manager s opportunity wage increases in his expertise depends on the nature of that expertise i e whether it is general or firm specific the analysis demonstrates that when managerial expertise is largely firm specific general the optimal pay performance sensitivity is lower higher than its optimal value in a benchmark setting of symmetric information furthermore when managerial skills are largely firm specific general the optimal pay performance sensitivity decreases increases as managerial skills become a more important determinant of firm performance unlike the standard agency theoretic prediction of a negative trade off between risk and pay performance sensitivity this paper identifies plausible circumstances under which risk and incentives are positively associated in addition to providing an explanation for why empirical tests of risk incentive relationships have produced mixed results the analysis generates insights that can be useful in guiding future empirical research

transactions costs and the efficient organization of production a study of timber harvesting contracts a transaction costs framework is developed to explain the choice between lump sum and per unit payment provisions in private timber harvesting contracts predictions about which contract type minimizes the transaction costs of presale measurement and contract enforcement and monitoring are derived and tested using private timber sales contracts from north carolina the empirical results provide strong support for the transaction costs approach and also reject several predictions from a risk based model the transaction costs framework also provides insights into the choice between negotiated and competitive sales procedures

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

uncertainty entrepreneurship and sharecropping in india this study attempts to explain the coexistence of different farm lease arrangements in terms of the varying significance of entrepreneurial functions in india crop sharing arrangements are common in areas of relative economic certainty with very little scope for decision making for example for product and factor substitution and where the entrepreneurial profit is low fixed cash rents are common in situations of high uncertainty where the scope for decision making is significant or where the crops are highly profitable efficiency considerations predominate in areas of sharecropping favoring a smaller farm size whereas under high uncertainty large size is favored for reducing risk

looking for a theory of the firm future challenges in this paper we present the main developments of the theories of the firm rooted in coase s coase r h 1937 the nature of the firm economica new series 4 386 405 seminal article we show that the two important topics of the nature and boundaries of the firm as well as the internal organization of the firm give place to essential contributions we present those contributions and their limits and then their possible developments finally we introduce the papers of this issue

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

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

regional dependencies in job creation an efficiency analysis for western germany this paper investigates the efficiency of the matching process between job seekers and vacancy posting firms in west germany using variation across labour market regions and across time the results of a stochastic frontier analysis shed new light on the extent of and regional differences in search frictions on potential determinants of frictional inefficiencies and on the consequences of german reunification for the matching process the paper also presents novel evidence on the complex interactions between spatial contingencies among regional labour markets matching efficiency decreases with spatial autocorrelation in hiring implying indirect evidence for crowding externalities