on the theory of reference dependent preferences a theory is proposed in which preferences are conditional on reference points it is related to tversky and kahneman s reference dependent preference theory but is simpler and deviates less from conventional consumer theory preferences conditional on any given reference point satisfy conventional assumptions apart from a continuity condition the only additional restriction is to rule out cycles of pairwise choice the theory is consistent with observations of status quo bias and related effects reference points are treated as subject to change during the course of trade the implications of endogeneity of reference points for behaviour in markets are investigated

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

incentives productivity and labor contracts the relationship between age earnings profiles and worker incentives is examined by contrasting wage and salary workers with the self employed it is argued that the steepness of wage and salary workers age earnings profiles reflects the desire to provide work incentives to those workers since self employed workers do not face this agency problem they are used as a benchmark to gauge productivity empirical support of the proposition is provided and the effects of human capital accumulation are separated empirically from incentive effects the most important conclusion is that under some strong assumptions most of the slope in age earnings profiles is accounted for by the desire to provide incentives rather than by on the job training

short term contracts and long term agency relationships abstract long term contracts are valuable only if optimal contracting requires commitment to a plan today that would not otherwise be adopted tomorrow we show that commitments are unnecessary and hence short term contracts are sufficient if 1 all public information can be used in contracting 2 the agent can acess a bank on equal terms with the principal 3 recontracting takes place with common knowledge about technology and preferences and 4 the frontier of expected utility payoffs generated by the set of incentive compatible contracts is downward sloping at all times

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

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

multitask agency and contract choice an empirical exploration the multitask agency problem is examined empirically using contracts between private integrated oil companies and their service stations in the city of vancouver the empirical tests assess how variations in the characteristics of one task affect the choice of agent compensation scheme for another comparative statics from the model predict that higher powered incentives will be offered for gasoline sales when the secondary activity is not highly complementary with gasoline retailing where complementarity is measured by the cross price demand effect the covariation in uncertainty and the degree of effort substitutability copyright 1996 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

contingent capital with a capital ratio trigger contingent capital in the form of debt that converts to equity when a bank faces financial distress has been proposed as a mechanism to enhance financial stability and avoid costly government rescues specific proposals vary in their choice of conversion trigger and conversion mechanism we analyze the case of contingent capital with a capital ratio trigger and partial and ongoing conversion the capital ratio we use is based on accounting or book values to approximate the regulatory ratios that determine capital requirements for banks the conversion process is partial and ongoing in the sense that each time a bank s capital ratio reaches the minimum threshold just enough debt is converted to equity to meet the capital requirement so long as the contingent capital has not been depleted we derive closed form expressions for the market value of such securities when the firm s asset value is modeled as geometric brownian motion and from these we get formulas for the fair yield spread on the convertible debt a key step in the analysis is an explicit expression for the fraction of equity held by the original shareholders and the fraction held by converted investors in the contingent capital this paper was accepted by gerard p cachon stochastic models and simulation

implicit contracts incentive compatibility and involuntary unemployment this paper considers the enforceability of employment contracts when employees performance cannot be verified in court so that piece rate contracts are not legally enforceable part i shows that there exists a variety of self enforcing implicit contracts modelled as perfect equilibria in a repeated game and characterizes all the wage and performance outcomes that can be implemented implementation requires a strictly positive surplus from employment the form of the contract depending on how this surplus is divided between firm and employee piece rate contracts and contracts with an informally agreed bonus can be made self enforcing but the use of severance pay and bonding does not extend the set of implementable allocations the resulting contracts resemble actual labor contracts more than do the contracts in standard principal agent models part ii analyses market equilibrium with these contracts also modelled as perfect equilibria in a repeated game and shows that many such equilibria exist unfilled vacancies and unemployed workers can co exist despite the existence of contracts that are potentially mutually beneficial for those jobs that are filled any division of the potential surplus is possible so that the market can have at the same time involuntary unemployment and vacancies that are unfilled despite filled jobs earning positive profits as a criterion for selecting equilibria a notion of renegotiation proofness is applied then either all workers are employed or all jobs filled but any division of the potential surplus is still possible the paper explores what further restrictions on beliefs give rise to a walrasian outcome in which all the potential surplus goes to the short side of the market and to an efficiency wage type outcome in which the potential surplus goes to the long side

payment systems and the structure of inequality conceptual issues and an analysis of salespersons in department stores output related payment systems such as commissions and piece rates are common in many jobs their central feature is that the wage of an employee is tied directly to her current performance focusing on salespersons in department stores the author considers wage differences under three payment systems a straight salary a straight commision and a salary plus commission four conceptions of wage inequalities under the three systems are contrasted a risk sharing a bargaining a sorting and a social status interpretation the empirical analyses compare the pay schemes and wages of approximately 63 000 salespersons in 178 department stores in 1981

relational incentive contracts standard incentive theory models provide a rich framework for studying informational problems but assume that contracts can be perfectly enforced this paper studies the design of self enforced relational contracts i show that optimal contracts often can take a simple stationary form but that self enforcement restricts promised compensation and affects incentive provision with hidden information it may be optimal for an agent to supply the same inefficient effort regardless of cost conditions with moral hazard optimal contracts involve just two levels of compensation this is true even if performance measures are subjective in which case optimal contracts terminate following poor performance jel c73 d82 l14

gender piece rates and wages evidence from matched employer employee data why are women disproportionately on piece rates we investigate three possible explanations 1 women are more likely to be on piece rates because they have a shorter expected tenure than men 2 a greater demand for flexibility between work and home attracts women to work place technologies suitable for variable pay based on individual performance 3 women prefer piece rates because they are subject to less wage discrimination when objective performance measures are available the weight of our empirical evidence supports the third hypothesis the unexplained gender wage gap is substantially smaller in the piece rate regime than in the time wage regime copyright 2004 oxford university press

taxes intermediate goods and relative prices the case of variable coefficients abstract price effects of an output tax in sector 1 and an equivalent production subsidy in the second industry are analyzed in a general equilibrium model each commodity satisfies final demand and uses two primary inputs and the other good as an intermediate product production coefficients are variable and demand is elastic in a leontief model with fixed coefficients metzler showed that price of the taxed good will rise and price of the subsidized good will fall this result generally holds under less restrictive conditions also although it is sometimes reversed how the topic relates to the tax incidence literature is also discussed

credit access and college enrollment does access to credit explain the gap in schooling attainment between children from richer and poorer families i present new evidence on this important question based on the causal effects of two

on repeated moral hazard with discounting in this paper we analyze optimal contracts in an infinitely repeated agency model in which both the principal and agent discount the future we show that there is a stationary representation of the optimal contract when the agent s conditional discounted expected utility is used as a state variable this representation reduces the multi period problem to a static variational problem which can be analyzed using standard variational techniques this reduction is used to obtain several properties of the contract

competition and relational contracts the role of unemployment as a disciplinary device when workers are faced with the threat of unemployment their relationship with a particular firm becomes valuable as a result a worker may comply with the terms of a relational contract that demands high effort even when performance is not enforceable by a third party but can relational contracts motivate high effort when workers can easily find alternative jobs we examine how competition for labor affects the emergence of relational contracts and their effectiveness in overcoming moral hazard in the labor market we show that effective relational contracts do emerge in a market with excess demand for labor long term relationships turn out to be less frequent when there is excess demand for labor than they are in a market characterized by exogenous unemployment however stronger competition for labor does not impair labor market efficiency higher wages induced by competition lead to higher effort out of concerns for reciprocity

reference dependent consumption plans we develop a rational dynamic model in which people are loss averse over changes in beliefs about present and future consumption because changes in wealth are news about future consumption preferences over money are reference dependent if news resonates more when about imminent consump tion than when about future consumption a decision maker might to generate pleasant surprises overconsume early relative to the optimal committed plan increase immediate consumption following surprise wealth increases and delay decreasing consumption following surprise losses since higher wealth mitigates the effect of bad news people exhibit an unambiguous first order precautionary savings motive

estimating a firm s age productivity profile using the present value of workers earnings in hiring new workers risk neutral employers equate the present expected value of each worker s compensation to the present expected value of his her productivity data detailing how present expected compensation varies with the age of hire embed therefore information about how productivity varies with age this paper infers age productivity profiles using data on the present expected value of earnings of new hires of a fortune 1000 firm for each of the five occupation sex groups considered productivity falls with age with productivity exceeding earnings for young workers and vice versa for older workers