some comments on free riding in leontief partnerships hans k hvide holmstrom bell journal of economics 13 1982 324 40 showed that freeriding is inevitable in partnerships where inputs are substitutes legros and matthews review of economic studies 68 1993 599 611 and vislie journal of economics behavior and organization 23 1994 83 91 showed that when inputs are strict complements leontief technology free riding can be avoided with a linear sharing rule this paper considers the robustness and some extensions of the positive result of these articles first i show that legros and matthews s and vislie s results are not robust to the introduction of participation constraints and limited liability however i construct a novel rule that mitigates that problem second i perturb the deterministic model of the other authors it turns out that free riding is avoidable with noise added to joint output and is inevitable when noise is added to individual productivity jel c72 d20 d29 d82 i introduction a long tradition in economics compares the performance of different ownership arrangements of firms capitalist firms are defined through separating ownership and production by having an outside owner and partnership firms split the value of production in full between the partners building on alchian and demsetz 1972 the seminal paper by holmstrom 1982 argues that partnership firms may suffer from free riding problems holmstrom 1982 shows that efficient provision of effort is not consistent with nash behavior in static partnership games where inputs are substitutes and actions are noncontractible capitalist firms on the other hand can mitigate the free rider problems by a principal breaking the budget i e keep some of the surplus for oneself whenever one observes a low joint output motivated by the many examples of partnerships in the real world considerable literature has questioned the generality of holmstrom s result 1 the present article considers a particular branch of that literature works that explore effort taking in leontief partnerships partnerships where joint output is determined by the partner with the least effort 2 legros and matthews 1993 section 3 1 and vislie 1994 hereafter abbreviated lmv find that if production is determined in such a manner there exists a linear sharing rule denoted beta sup that implements the efficient provision of effort and hence eliminates free riding the intuition for this result is that given that the other agents stick to the efficient action no agent can gain by providing more effort because output does not change and can be made to support the full decrease in output since his deviation is proportional to the change in output the present article discusses the robustness of the implementation result of lmv in two different directions by introducing participation constraints and limited liability on one hand and by introducing noise in the production on the other hand let me articulate why it is important to test for robustness along these two directions first the partnership literature has largely ignored whether a partnership can be expected to agree ex ante on efficient sharing rules when such rules exist the interesting problem is that a partner with a strong bargaining power may wish to settle on a non efficient rule if that gives him or herself a greater return hence it is of importance to have sharing rules that make provision of effort incentive compatible under any distribution of participation constraints to distribute a large share of surplus to agents with strong bargaining power proposition 1 see below constructs a simple sharing rule that solves the participation problem this sharing rule which is inspired by the groves s mechanism has the attractive property of implementing the efficient provision of effort under any conceivable distribution of participation constraints

too much monitoring not enough performance pay this paper endogenises the internal organisation of competitive firms in a simple general equilibrium framework the options are monitored teams unmonitored teams motivated by collective performance pay and self employment the choice of incentive scheme depends on market price and also affects price through its influence on output as more people opt for self employment pecuniary externalities increase the pressure on the rest to follow suit and pareto rankable multiple equilibria arise the conditions for a competitive equilibrium to be constrained efficient are restrictive and everyone may gain from policies limiting monitoring and self employment and from the imposition of entry taxes

evidence of nonlinearity in daily stock returns this article applies a newly developed statistical technique to time series of daily rates of return of 15 common stocks the technique involves estimating the bispectrum of the observed time series the bispectrum is defined as the double fourier transform of the third order cumulant function if the process generating rates of return is linear with independent innovations then the skewness of the bispectrum will be constant the article describes a test that can detect nonconstant skewness in the bispectrum hence if the test rejects constant skewness a nonlinear process is implied as a consequence the test can distinguish between white noise and purely random noise the results suggest that daily stock returns are generated by a nonlinear process

career concerns incentives and endogenous learning in labour markets models of career concerns provide a framework for analyzing the actions that may be taken by a manager in an attempt to influence performance signals that the market uses to update its beliefs on her productivity and the incentive problem that arises if such actions do not coincide with those that maximize the financial return to a firm s owner this survey provides a formal introduction to the main types of models of career concerns hidden action and hidden information and discusses some extensions of these models applications of the career concerns framework to explain aspects of managerial behavior and the form of labor market institutions are emphasized copyright 1992 by blackwell publishers ltd

efficiency and equilibria in complementary teams abstract this paper considers a team or partnership where the partners effort levels enter as strict complements in the production function the existence of a linear budget balancing sharing mechanism is demonstrated which implements the team s efficient outcome as a nash equilibrium this result is in contrast to a result derived in holmstrom 1982

is the efficiency wage efficient the social norm and organizational corruption the effectiveness of efficiency wage incentives is often jeopardized by perverse organizational corruption we model organizational corruption as a phenomenon of social interaction and relate the substantial psychological role characterizing the social norm to the corruption problem we find that if the status quo bribery rate within the firm is high social norms can no longer serve as a sufficient sanction against a corrupt supervisor pandemic organizational corruption tends to generate a critical mass effect the snowball effect which intensifies the corruption effect this intensified effect due to the snowballing character of social norms may more than offset the usual incentive effect of wages resulting in more widespread shirking in the firm jel classification d82 j41

blame game politics in a coalition government abstract delays in the adoption of reforms is an important question in political economics this paper explores this issue in the context of a representative democracy where the government is a coalition and citizens observe neither the decision making process nor politicians preferences for a reform we show that a coalition member who favors a reform may nonetheless choose to veto its adoption thus delaying it until after the next election and let his coalition partners share the blame for the non adoption we refer to this strategy as blame game politics we then identify three reasons for a politician to play the blame game one is to make an issue salient in the next election a second reason is to avoid a split in his electorate which is accomplished by hiding his stance on an issue a third reason is to enhance bargaining power during the formation of the next government

volatility clustering in real interest rates theory and evidence abstract in this paper we document that the volatility of monthly real interest rates is characterized by long periods of relatively constant volatility interrupted by short periods of sharp increases in volatility moreover volatility is correlated with measures of economic activity and financial market frictions in particular the conditional variance of real interest rates is negatively correlated with the growth rate of industrial production and positively correlated with the spread between the borrowing and the lending rate we develop an equilibrium model with financial frictions that is able to mimic the observed behavior of the volatility of interest rates the model can explain the negative correlation of the conditional variance with the business cycle and the positive correlation with the spread between the borrowing and the lending rate

urban influence on costs of production in the corn belt this article determines the relative technical efficiency of rural and urban influenced crop livestock enterprises in the corn belt farmers in urban influenced locations are less technically efficient than farmers in rural locations during 1998 2000 stochastic production frontier procedures indicate that a 10 increase in urban influence leads to a close to 4 decrease in technical efficiency the most successful urban influenced farms have controlled costs as effectively as rural farms they have tended to de emphasize that nondairy livestock activities particularly beef and hogs do not rely extensively on off farm income and have relatively large less residential lifestyle operations compared to less successful urban influenced farmers however our statistical analysis clearly bears out the refrain in popular literature that urban proximity raises the cost for and decreases the viability of traditional farms

self selection and the efficiency of tournaments when exogenously imposed rank order tournaments have incentive properties but their overall efficiency is reduced by a high variance in performance bull schotter and weigelt 1987 however since the efficiency of performance related pay is attributable both to its incentive effect and to its selection effect among employees lazear 2000 it is important to investigate the ex ante sorting effect of tournaments this paper reports results from an experiment analyzing whether allowing subjects to self select into different payment schemes helps in reducing the variability of performance in tournaments we show that when the subjects choose to enter a tournament the average effort is higher and the between subject variance is substantially lower than when the same payment scheme is imposed sorting is efficiency enhancing since it increases the homogeneity of the contestants we suggest that the flexibility of the labor market is an important condition for a higher efficiency of relative performance pay

a flexible specification of adjustment costs in dynamic factor demand models this paper proposes a flexible form of adjustment cost function an empirical illustration shows that the flexible form can detect both convex and non convex adjustment costs furthermore the flex

the dispersion of employees wage increases and firm performance previous studies examining intra firm wage dispersion and firm performance have focused on wage levels the authors of this study argue that for purposes of comparing wage dispersion s positive inc

rewards to academia the remuneration of vice chancellors and principals this paper models the financial remuneration to vice chancellors and principals at uk higher education institutions after describing the alternative theoretical underpinnings for the determination of pay an earnings function is estimated utilizing institutional and personal characteristics the model suggests only a partial linkage of managerial and performance related indicators to remuneration levels this suggests substantial scope for reorientation of rewards towards such indicators rather than relying on an efficiency wage this would appear particularly appropriate given the present and continued disclosure of this information together with the increased focus on performance indicators relating to teaching and research within the uk higher education sector

an empirical model of labor supply in a life cycle setting this paper formulates and estimates a structural intertemporal model of labor supply using theoretical characterizations derived from an economic model of lifetime behavior a two step empirical analysis yields estimates of intertemporal and uncompensated substitution effects which provide the information needed to predict the response of hours of work to life cycle wage growth and shifts in the lifetime wage path

spurious welfare reversals in international business cycle models several papers have documented spurious welfare reversals incompletemarkets economy produces a higher level of welfare than the completemarkets economy this paper first demonstrates how conventional linearization can generate approximation errors that can result in welfare reversals using a two country production economy we argue that spurious welfare reversals are not only possible but also plausible under reasonable values for model parameters this paper then proposes an approximation method that modifies the conventional linearization by a bias correction this method can be easily implemented and approximates welfare as accurately as a second order perturbation method

are workers paid their marginal products status is like coase s social costs a reciprocal phenomenon given that one person s gain in status can occur only at the expense of a loss in status for others and that workers are free to choose their coworkers it follows that the competitive wage structure within a firm must be one in which individual wage differences understate individual differences in marginal products the purpose of this paper is to examine a variety of empirical evidence that relates to this proposition about the firm s internal wage structure the paper is organized as follows section i briefly summarizes the theoretical considerations that govern competitive wage determination when status matters to people and firms are viewed as voluntary associations of workers section ii then confronts the predictions of section i by examining pay and productivity schedules for a group of sales occupations for which these schedules are relatively easily observed section ii also examines the relationship between wages and productivity for a sample of university professors an occupation in which individual productivity differences are for a variety of obvious reasons relatively more difficult to measure all of the evidence examined is consistent with the hypothesis that within firms wage rates vary substantially less than do individual productivity values section iii discusses additional observations and evidence that bear on this same hypothesis it suggests that the implicit market for status may strongly influence the ways in which firms are organized to carry out the tasks they perform section iv concludes by considering the claim that egalitarian internal wage structures arise because of equity considerations it argues that the concept of equity appears very closely linked to the concept of status and suggests a strategy for assigning monetaty value to the equity considerations that so often dominate public policy decisions

rewarding performance by promotion to a different job abstract use of promotions rather than performance related pay to provide incentives can be justified if performance is non verifiable information this does not explain why promotion is to a different job rather than simply a better paid job the effectiveness of tournaments is undermined however if unsuccessful workers are equally suited to higher paid jobs and can engage in bribery or other influence activity a promotion based reward structure with pay tied to jobs can be made immune to such activity if misallocations of employees to jobs are costly to the firm

incentives for helping on the job theory and evidence recent advances in incentive theory stress the multidimensional nature of agent effort and specifically cases where workers affect one anothers performance through helping efforts this article models helping efforts as determined by the compensation package and task allocation the model is tested with australian evidence on reported helping efforts within work groups the evidence consistently supports the hypothesis that helping efforts are reduced while individual efforts are increased when promotion incentives are strong piece rates and profit sharing appear to have little effect on helping efforts while task variety and helping efforts are positively correlated

widening and deepening reforming the european union the european union is the product of a unique institutional process individual states often with a history of belligerent relationships have gradually given up ever more sovereignty to produce an increasing number of common goods including the single market a joint cur rency and common policies in the process the union has integrated increasingly diverse coun tries and achieved institutional progress beyond its borders these achievements are particularly remarkable given that member states have had and still have widely different views of the desirable speed and ultimate depth of integra tion possibly the single most powerful force sustaining the process of integration has been the implicit and often explicit threat by more committed member states to form an inner core a club in the club conversely less enthusias tic members have supported extending member ship to more countries as a strategy to frustrate deeper integration

competition between and within teams abstract we consider the effect of team size the observability of effort and the competitiveness of the team s environment in determining team members allocations of effort between team oriented and selfish efforts

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

business cycle asymmetry a deeper look this paper distinguishes two types of asymmetry in business cycles deepness and steepness deepness is defined as the characteristic that troughs are further below trend than peaks are above most previous research has focused exclusively on steepness which refers to cycles in which contractions are steeper than expansions a test for deepness is proposed and applied to u s post war quarterly unemployment real gnp and industrial production evidence of deepness is found for unemployment and industrial production while the evidence for real gnp is weaker previous evidence of steepness in unemployment is confirmed

incentives and wage rigidity with the growth of the literature on incentive compensation has come the belief by some that incentive pay may be less rigid than pay that is not designed to effect incentives some have gone so far as to argue that this may explain differences in unemployment rates across countries it is shown that there is no direct link between incentives and wage rigidity many compensation schemes that provide incentives have the reverse effect that is they tend to make wages more rigid than would be the case were incentives not an issue atall this paper explores the relationship between wage rigidity and the provision of incentives in a variety of circumstances this abstract was borrowed from another version of this item

nonconvex factor adjustments in equilibrium business cycle models do nonlinearities matter recent empirical analysis has found nonlinearities to be important in understanding aggregated investment using an equilibrium business cycle model we search for aggregate nonlinearities arising from the introduction of nonconvex capital adjustment costs we find that while such costs lead to nontrivial nonlinearities in aggregate investment demand equilibrium investment is effectively unchanged our finding based on a model in which aggregate fluctuations arise through exogenous changes in total factor productivity is robust to the introduction of shocks to the relative price of investment goods

new ventures and their credit terms using uk bank data for 466 new venture loan applications we explore the determinants of interest margin the sanctioning decision and the amount borrowed when these factors are considered simultaneously collateral levels greatly influence the size of credits to new ventures a finding consistent with existing work on firm foundation rates and assets black et al economic journal 106 60 75 1996 de meza and webb the economic journal 109 153 163 1999 evans and jovanovic journal of political economy 97 4 808 827 1989 holtz eakin et al 1994 consistent with the rand journal of economics 25 334 347 diversionary models of debt firms with larger credits enjoy discounted interest margins even when we have controlled for firm size

moral hazard and optimal contract form for r d cooperation abstract this paper aims to explain the use of different governance modes for r d cooperation we argue that ex ante cross licensing agreements are preferred to r d joint ventures if potential synergy effects are negligible and the double moral hazard problem caused by unobservable r d effort can be solved by an appropriate royalty scheme it is shown that the first best effort decisions are implementable by a cross licensing agreement if royalty payments are based on r d success however if the payments have to be based on actual know how transfer because r d success is not verifiable there are cases where joint ventures are necessary to induce optimal r d effort

is the business cycle characterized by deterministic chaos abstract tests are conducted on u s macroeconomic data for the presence of low dimensional deterministic chaos where deterministic chaos is defined as in grandmont s 1985 walras bowley lecture or in brock 1986 the idea is to test for evidence of endogenous instability causing the business cycle low order autoregressions are hard to reject with our methods evidence of chaos is weak but our tests may be too weak to detect it evidence of nonlinearity is present in employment 1950 i to 1983 iv unemployment 1949 i to 1982 iv monthly post war industrial production and pig iron production 1877 1937

statistical nonlinearities in the business cycle a challenge for the canonical rbc model abstract the cyclical components of u s macroeconomic time series exhibit significant nonlinearities standard equilibrium models of business cycles cannot replicate nonlinear features of the data applying the efficient method of moments gallant a r tauchen g 1996 which moments to match econometric theory 12 4 657 681 to build an algorithm that searches over the model s parameter space establishes the parameterization that best allows replication of all statistical properties of the data the results show that under this parameterization the model captures nonlinearities in investment but fails to account for observed properties of consumption

optimal technology policy under asymmetric information in a research joint venture abstract we analyze the optimal technology policy to solve a free riding problem between the members of an rjv assuming that government intervention is subject to an additional adverse selection problem caused by its inability to distinguish the value of the potential innovation although subsidies and monitoring may be equivalent policy tools to solve firms free riding problem they imply different social losses if the government is not able to distinguish perfectly the value of the potential innovation the advantage of monitoring tools relative to subsidies is proved to depend on which type of information the government can obtain about firms r d performance

the incentive effects of tournaments revisited evidence from the european pga tour this analysis of data from the 1987 european men s professional golf association pga tour strongly supports the hypothesis that the level and structure of prizes in pga tournaments influence players performance specifically players performance appears to vary positively with both the total money prizes awarded in a tournament and the marginal return to effort in the final round of play a value that varies among players largely depending on how the prize money is allocated among finishers of different ranks the authors suggest that these results together with the similar results of their earlier study of the 1984 u s men s pga tour may have implications for the design of compensation systems for certain groups of workers such as corporate executives college professors and salespeople

tournaments without prizes evidence from personnel records we use a quasi experimental research design to study the effect of giving workers feedback on their relative performance the setting is a firm in which workers are paid piece rates and where for exogenous reasons management begins to reveal to workers their relative position in the distribution of pay and productivity we find that merely providing this information leads to a large and long lasting increase in productivity that is costless to the firm our findings are consistent with the interpretation that workers incipient concerns about their relative standing are activated by information about how they are performing relative to others this paper was accepted by olav sorenson organizations

efficient and nearly efficient partnerships this paper shows in two ways that the degree to which free riding diminishes the performance of deterministic partnerships may be less than has been generally thought first a necessary and sufficient condition is provided for a partnership to sustain full efficiency it implies that many non trivial partnerships sustain efficiency such as generic ones with finite action spaces and neoclassical ones with leontief technologies second approximate efficiency is shown to be achievable in a large class of partnerships including ones with smooth and monotonic production and disutility functions approximate efficiency is achieved by mixed strategy equilibria one partner takes with small probability an inefficient action the degree to which efficiency is approximated is restricted only by the amount of liability the partners can bear nonetheless their equilibrium payments are not arbitrarily large

contractual incompleteness and the optimality of equity joint ventures firms engaged in the pooling of complementary skills often choose the equity joint venture ejv over alternative profit sharing arrangements this paper addresses the issue of how equity shares are different from profit shares it is shown that in settings of contractual incompleteness marketable equity ownership when compared to non transferable profit sharing contracts provides better ex ante incentives to the parties involved by mitigating ex post hold up problems among other things the prevalence of the 51 49 or 50 50 ejv in which one party has 51 percent or 50 percent equity shares is explained

time varying income and price elasticities for energy demand evidence from a middle income panel abstract we estimate time varying income and price elasticities for energy demand for a 26 country middle income balanced panel that spans 1996 2014 to do so we employ a recently developed local linear dummy estimation method to estimate the trend and coefficient functions we find that the price elasticity for energy demand is either insignificant or positive and small while the income elasticity for energy demand behaves in a non linear fashion over time it is always less than unity and is generally within 0 6 0 8 a gdp elasticity of less than one suggests that these middle income countries are on the right hand side of an inverted u energy intensity gdp path that is consistent with the dematerialization process also this finding suggests that energy intensity but not energy consumption in these countries will fall with economic growth hence intensity based targets may be met in a business as usual setting but aggregate or per capita based carbon emissions targets would likely require policy interventions

seminonparametric estimation of conditionally constrained heterogeneous processes asset pricing applications the overidentifying restrictions of the intertemporal capital asset pricing model are usually rejected when tested using data on consumption growth and asset returns particu larly when additively separable constant relative risk utility is attributed to the representa tive agent this article investigates the extent to which specification error can explain these rejections the empirical strategy is limited information maximum likelihood in conjunc tion with seminonparametric expanding parameter space representations for both the law of motion and utility we find that consumption growth and asset returns display conditional heterogeneity but this fact does not account for rejection of the overidentifying restrictions as might be anticipated from the work of hansen singleton and others using generalized method of moments methods we also find that expansion of the parameter space in the direction of nonseparable utility causes the overidentifying restrictions to be accepted our estimation strategy provides information on the manner in which the restrictions distort the law of motion in particular imposition of additively separable constant relative risk aversion utility causes the conditional variance of consumption growth to be overpredicted the conditional covariance of asset returns with consumption growth to be overpredicted and an equity premium imposition of nonseparable seminon parametric utility causes distortion in these same directions though the distortions are much smaller which is consistent with the outcomes of the tests of the restrictions

explaining investment dynamics in u s manufacturing a generalized s s approach we are grateful to olivier blanchard whitney newey james stock an editor three anonymousreferees and seminar participants at brown cepr champoussin chicago columbia econometric society meetings caracas and tokyo efcc harvard impa lse nber princeton rochester site toronto u de chile and yale for their comments financial support to caballero from the national science and sloan foundations and to engel from fondecyt grant 195 510 and the mellon foundation grant 9608 is gratefully acknowledged 2since plants entry is excluded from their sample these statistics are likely to represent lowerbounds on the degree of lumpiness in plants investment patterns 3we use the word project to emphasize the fact that the actual implementation of a projectmay cover more than a year observation realistic time to build aspects of investment are not incontradiction with the view that investment episodes are lumpy in nature 4 see chirinko 1994 for a survey of the empirical investment literature

lying to level the playing field why people may dishonestly help or hurt others to create equity unethical and dishonest behavior has increasingly attracted the attention of scholars from various disciplines recent work has begun to focus on a previous overlooked factor predicting dishonest behavior the beneficiary or victim of dishonest acts in two laboratory experiments we manipulate the level of resources allocated to our participants their wealth and investigate whether perceived inequity from wealth that is randomly or subjectively assigned leads individuals to cross ethical boundaries through helping or hurting others the results show that dishonest behavior is influenced by positive and negative inequity that motivates helping and hurting acts furthermore a third experiment shows that people tend to discount the wrongness of crossing ethical boundaries to hurt or help others when the action restores equity

nonlinear time series modelling an introduction recent developments in nonlinear time series modelling are reviewed three main types of nonlinear model are discussed markov switching threshold autoregression and smooth transition autoregression classical and bayesian estimation techniques are described for each model parametric tests for nonlinearity are reviewed with examples from the three types of model finally forecasting and impulse response analysis is developed

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

managerial objectives capital structure and the provision of worker incentives worker incentive schemes are invariably assumed to be administered by an owner entrepreneur who has an incentive to understate worker performance after the event while tournaments can overcome this problem they discourage cooperation between workers we show that a professional manager concerned with equality between workers and with avoiding bankruptcy rather than maximizing shareholder wealth will conduct a tournament that preserves individual effort incentives while promoting cooperation between workers the theory predicts lower debt levels and more compressed pay scales as cooperation becomes more important in the limit this becomes a group bonus scheme supported by blue chip debt

are economic time series asymmetric over the business cycle it has long been argued that major cyclical variables such as the unemployment rate display an asymmetric behavior over various phases of the business cycle the paper provides a statistical test for this hypothesis using the framework of finite state markov processes i implement a test to see if the behavior of the unemployment rate is characterized by sudden jumps and slower drops it is argued that the framework provided in the paper can also be used to test other sample path properties of economic time series

optimal contracts for teams in a team subject to both adverse selection each member s ability is known only to himself and moral hazard effort cannot be observed optimal contracts are under certain conditions linear in the team s output the outcome is the same whether the principal observes just the total output or each individual s contribution thus monitoring is not needed to prevent shirking by team members instead the role of monitoring is to discipline the monitor production is a collective enterprise by workers in a firm or firms in a joint venture the synergy that is the reason for the team s existence may mean that an individual s contribution to the team s output is not distinguishable so that it is impossible to pay him according to his own productivity how should the principal remunerate the team members so as to maximize his own profit in this paper we analyze incentives in teams with asymmetric information both adverse selection each member s ability is known only to himself and moral hazard effort cannot be observed directly holmstrom 1982 showed that in a team model with moral hazard the principal can ensure an outcome arbitrarily close to the full information ideal by using a contract that punishes each team member arbitrarily severely whenever team output falls below some target however this seems to be an unrealistically drastic way of solving the moral hazard problem in our model we in effect prevent the principal from using such a contract by introducing adverse selection in addition to moral hazard and by assuming that ability and effort interact in such a way that the principal is unable to disentangle an agent s effort from his ability under the assumption that the principal and the team members are risk neutral we shall show that the principal can implement his information constrained optimum simply by offering each agent a payment linear in the team s output although the essential feature of our analysis is the interaction between adverse selection and moral hazard this result can be understood by first considering the special case in which the agents abilities are common knowledge in this case the moral hazard problem can be completely solved the principal can do as well as he

the effect of production technology on trust and reciprocity in principal agent relationships with team production we introduce differently sized teams rather than a single worker and three production technologies to an otherwise standard gift exchange environment to study experimentally whether and to what extent trust and reciprocity is affected moving to a team of workers introduces new motivations such as free riding and coordination burden that are likely to intensify with team size and the technology used by the firm we find that the positive relationship between wages and effort although affected still holds workers reduce their efforts when coordination for efficiency is more difficult using a particular production technology results also suggest that for any given technology firms react to their relevant outcome profitability and not just to workers efforts

technology choice relative performance pay and worker heterogeneity abstract we identify a new problem that may arise when heterogeneous workers are motivated by relative performance pay if workers abilities and the production technology are complements the firm may prefer not to adopt a more advanced technology even though this technology would costlessly increase each worker s productivity due to the complementarity between ability and technology under technology adoption the productivity of a more able worker increases more strongly than the productivity of a less able colleague as a consequence both workers motivation to exert effort is reduced we show that this adverse incentive effect is dominant and consequently keeps the firm from introducing a better production technology if talent uncertainty is sufficiently high and or monitoring of workers is sufficiently precise

externalities in economies with imperfect information and incomplete markets this paper presents a simple general framework for analyzing externalities in economies with incomplete markets and imperfect infonnation by identifying the pecuniary effects of these externalities that net out the paper simplifies the problem of determining when tax interventions are pareto improving the approach indicates that such tax interventions almost always exist and that equilibria in situations of imperfect information are rarely constrained pareto optima it can also lead to simple tests based on readily observable indicators of the efficacy of particular tax policies in situations involving adverse selection signaling moral hazard incomplete contingent claims markets and queue rationing equilibria traditional discussions of externalities have emphasized the distinction between technological externalities in which the action of one individual or firm directly affects the utility or profit ofanother and pecuniary externalities in which one individual s or firm s actions affect another only through effects on prices while the presence of technological externalities imply in general that a competitive equilibrium may not be pareto efficient pecuniary externalities hy themselves are not a source of inefficiency the fact that prices change has of course important consequences there are both distributional and allocational effects but the distribution effects net out gains for example hy firms whose prices increase are precisely offset by losses e g to individuals who must pay higher prices and there are no welfare losses from the allocation effects as long as the price changes involved are small if firms are maximizing profits and individuals are maximizing utility both facing prices that correctly refiect opportunity costs then standard envelope theorem arguments imply that changes in profits or utility induced by changes in allocations resulting from any small change in prices are negligible

piece rate contracts for other regarding workers when workers are paid with piece rates inequality arises naturally we consider workers who care about income comparisons and are either status seeking or inequality averse we identify circumstances under which inequality attitudes lead workers to exert more effort than they would otherwise and also circumstances under which workers inequality attitudes lead firms to set lower piece rates than they would otherwise the key behavioral assumption for both of these results to hold when workers are identical is behindness aversion the property that changes in inequality matter more to the worker when he is behind than when he is ahead jel d01 j33 m52

the moral hazard of budget breaking it has recently been suggested in the agency literature that moral hazard in teams can be dealt with by introducing a third party who breaks the budget balancing constraint and that this facilitates the design of contracts that can sustain the pareto optimum as a perfect nash equilibrium this note offers an explanation for why the use of budget breaking schemes is not so widespread as that of active monitoring despite the fact that such schemes would save the resources expended on supervision the note demonstrates that allowing the budget to be broken introduces the potential for moral hazard on the part of the third party which could render the proposed equilibrium incredible

managerial incentives and product market competition are imperfectly competitive leibenstein 1966 claims that there may be a substantial amount of x inefficiency where x inefficiency measures the degree to which actual profits depart from the maximum of profits that could be obtained if all operations in the firm were carried out at minimal costs he offers empirical evidence from case studies showing that the welfare loss due to organizational slack is of an order of magnitude bigger than the welfare loss due to monopolistic price distortions on imperfectly competitive markets these results support the common presumption that increasing competition reduces organizational and in particular managerial slack however this early literature does not offer a theoretical explanation for the link between competition and managerial incentives in particular it ignores the fact that managerial incentives can be affected by the design of an incentive scheme in this paper i derive the optimal incentive scheme for a manager as a function of the competitiveness of the environment in which his firm operates the basic impact of increased competition is that it reduces the profits of a firm this has two effects in the model first if a firm has high costs then the reduction of profits may be sufficient to render the firm unprofitable so the probability that it has to be liquidated goes up this unambiguously induces the manager of the firm to work harder for a cost reduction in order to avoid liquidation and to keep his job second the reduction in profits may affect

using cross section data to adjust technical efficiency indexes estimated with panel data this article proposes a procedure to incorporate cross sectional information in the estimation of technical efficiency indexes obtained from panel data a conventional index of technical efficiency is estimated in a first stage using panel data on inputs and outputs the individual effects from the first stage are then adjusted using cross sectional information obtaining a corrected technical efficiency index the model is applied to a panel of eighty two spanish dairy farms where only cross sectional information about input quality is available an analysis of variance is performed between some variables and both the corrected and the uncorrected indexes finding that the conclusions derived from the two analyses are different

linear versus nonlinear macroeconomies a statistical test a statistical test based on the estimated bispectrum is presented which can distinguish between the linear stochastic dynamics widely used in macroeconomic models and alternative nonlinear dynamic mechanisms including both nonlinear stochastic models and nonlinear deterministic chaotic models the test is applied to an aggregate stock market index and to an aggregate industrial production index in both cases the test easily rejects the null hypothesis of a linear stochastic generating mechanism this result strongly suggests that nonlinear dynamics deterministic or stochastic should be an important feature of any empirically plausible macroeconomic model copyright 1989 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

rigging elections with violence in most developing countries even today political parties spend a substantial fraction of their resources in attracting voters through ideological exhortation as well as force in this paper we present a model of political contest between two parties that compete in two distinct arenas though the goal of the contest in both arenas is the same to garner more political support in the first which we call ideological the contest involves no use of force in the second which we call conflictual party activists use violence either to force ideological supporters of the competing party to vote in their favor or restrain them from voting we show that a party with lower initial political support will resort to more political violence ceteris paribus and as the fraction of undecided voters goes up elections will tend to be less conflictual we also show that if there is an incumbency advantage then the resources devoted to creating political unrest increase in equilibrium and political competition is more violent we also provide some historic and journalistic evidence that supports our results

union relative wage effects a survey of macro estimates this paper surveys union wage effect estimates drawn from empirical cross section wage equations fitted to macro aggregated data in 34 post 1963 studies containing such equations each estimate is the partial derivative of the dependent wage variable in logarithmic units with respect to the extent of unionism fraction unionized variable in the equation this paper shows that these estimates contain a mixture in uncertain ratio of the union nonunion wage differential or wage gap on the one hand and an extent of unionism effect on the other therefore the macro estimates should not be interpreted as wage gap estimates

equality under threat by the talented evidence from worker managed firms does workplace democracy engender greater pay equality are high ability individuals more likely to quit egalitarian organisational regimes the article revisits this long standing issue by analysing the interplay between compensation structure and quit behaviour in the distinct yet underexplored institutional setting of worker managed firms the analysis is based on novel administrative data sources which allow constructing a simple ordinal measure of the workers ability type the article s key findings are that worker managed firms have a more compressed compensation structure than conventional firms and high ability members are more likely than other members to exit

firm size and technical efficiency applications of production frontiers to indian survey data abstract this paper is an empirical investigation of the relationship between relative technical efficiency and firm size in four indian manufacturing industries a frontier translog production function is used to derive measures of technical inefficiency at the enterprise level given the properties of the estimated production frontier these indices of technical efficiency are also indices of total factor productivity tfp which is the single most widely accepted measure of productive efficiency variations in technical efficiency are correlated with several explanatory variables including size of firm firm size is found to be positively associated with relative productive efficiency in only one of the four industries

social norms and economic incentives in firms abstract this paper studies the interplay between economic incentives and social norms in firms we introduce a general framework to model social norms arguing that norms stem from agents desire for or peer pressure towards social efficiency in a simple model of team production we examine the interplay of three types of contracts with social norms we show that one and the same norm can be output increasing neutral or output decreasing depending on the contract multiplicity of equilibria and crowding out effects of steeper incentives can arise

efficiency in partnerships we provide the necessary and sufficient condition for a partnership to be able to sustain efficiency when the output is stochastic when limited liability is imposed we show that only the level of the average liability of the partnership is important the individual levels of liability are irrelevant however the allocation of the total liability among the partners is crucial when additional conditions such as neutrality or individual rationality are imposed

the measurement and sources of technical inefficiency in the indonesian weaving industry production function models are estimated with a time series of cross section data on indonesian weaving establishments the sources of technical inefficiency are investigated three firm attributes are identified as being potentially related to firm efhciency tbey are firm ownership age and size the importance of these attributes as sources of inefficiency in the indonesian weaving industry is investigated and the implications of the find ings discussed

efficiency and equilibria in complementary teams a comment abstract we argue that visile s 1994 claim that the moral hazard in the teams problem depends on the assumption that the inputs are perfect substitutes is incorrect discontinuities in the marginal product curves not complementarity of the inputs allows the moral hazard problem to be avoided in vislie s perfect complements example

idiosyncratic shocks and the role of nonconvexities in plant and aggregate investment dynamics we examine a model of lumpy investment wherein establishments face persistent shocks to common and plant specific productivity and nonconvex adjustment costs lead them to pursue generalized s s investment rules we allow persistent heterogeneity in both capital and total factor productivity alongside low level investments exempt from adjustment costs to develop the first model consistent with available evidence on establishment level investment rates reassessing the implications of lumpy investment for aggregate dynamics in this setting we find that they remain substantial when factor supply considerations are ignored but are quantitatively irrelevant in general equilibrium the substantial implications of general equilibrium extend beyond the dynamics of aggregate series while the presence of idiosyncratic shocks makes the time averaged distribution of plant level investment rates largely invariant to market clearing movements in real wages and interest rates we show that the dynamics of plants investments differ sharply in their presence thus model based estimations of capital adjustment costs involving panel data may be quite sensitive to the assumption about equilibrium our analysis also offers new insights about how nonconvex adjustment costs influence investment at the plant when establishments face large and weakly persistent idiosyncratic productivity shocks consistent with existing estimates we find that nonconvex costs do not cause lumpy investments but act to eliminate them

the agent agents problem payment by relative output this paper begins an investigation into the incentive problems at a firm when the effort of the employer and the employees combines to determine final output the major conclusion is that optimal reward functions in this circumstance will in general value the performance of a worker relative to that of his peers the paper thus joins a growing literature associated with the work of lazear and rosen on rank order tournaments

cleaning house the impact of information technology monitoring on employee theft and productivity this paper examines how firm investments in technology based employee monitoring impact both misconduct and productivity we use unique and detailed theft and sales data from 392 restaurant locations from five firms that adopt a theft monitoring information technology it product we use difference in differences models with staggered adoption dates to estimate the treatment effect of it monitoring on theft and productivity we find significant treatment effects in reduced theft and improved productivity that appear to be primarily driven by changed worker behavior rather than worker turnover we examine four mechanisms that may drive this productivity result economic and cognitive multitasking fairness based motivation and perceived increases of general oversight the observed productivity results represent substantial financial benefits to both firms and the legitimate tip based earnings of workers our results suggest that employee misconduct is not solely a function of individual differences in ethics or morality but can also be influenced by managerial policies that can benefit both firms and employees this paper was accepted by serguei netessine operations management

business cycle asymmetries characterisation and testing based on markov switching autoregressions tests for business cycle asymmetries are developed for markov switching autoregressive models the tests of deepness steepness and sharpness are wald statistics which have standard asymptotics for the standard two regime model of expansions and contractions deepness is shown to imply sharpness and vice versa whereas the process is always nonsteep two and three state models of u s gnp growth are used to illustrate the approach along with models of u s investment and consumption growth the robustness of the tests to model misspecification and the effects of regime dependent heteroscedasticity are investigated

designing optimal sales contests a theoretical perspective sales contests are commonly used by firms as a short term motivational device to increase salespeople s efforts conceptually sales contests and piece rate schemes such as salary commission or quotas differ in that in sales contests payment to salespeople is based on relative rather than absolute sales levels using the agency theoretic framework where the firm is risk neutral and the salespeople are risk averse we examine how a firm should design an optimal contest to maximize its profit through stimulating salespeople s efforts specifically we investigate how many salespeople should be given awards and how the reward should be allocated between the winners three commonly used sales contest formats are studied in the first format termed as rank order tournament there are many winners and the amount of reward is based on relative rank achieved with larger amounts awarded to higher ranks we also examine two special cases of rank ordered tournament a multiple winners format where the reward is shared equally and a winner take all format where a single winner gets the entire reward we model salespeople s behavior by considering utility of the reward from achieving one of the winning ranks in the contest and assessing incremental chances of winning by exerting more effort the analysis was done for two situations based on whether the total reward is large enough for salespeople to participate in the effort maximizing sales contest or not the analysis shows that factors impacting contest design include the salespeople s degree of risk aversion number of salespeople competing in the contest and degree of sales uncertainty which reflects strength of the sales effort relationship the results show that salespeople exert lower effort when there are larger numbers of participants or when sales uncertainty is high we find that the rank order tournament is superior to the multiple winners contest format in a multiple winners format the salesperson whose performance is just sufficient to win is better off than any of the other winners as he exerts the least effort to win but obtains as high a reward as any other winners specific recommendations on contest designs are obtained assuming that sales follow either a logistic or uniform distribution assuming that sales outcome is logistically distributed and the contest budget is high enough to ensure participation our analysis shows that the total number of winners in a sales contest should not exceed half the number of the contestants this result is due to the symmetric nature of the logistic distribution our analysis also indicates that the total number of winners should be increased and the spread decreased when salespeople are more risk averse when salespeople are more risk averse their marginal values for higher rewards become smaller the spread should increase with ranks when rate of risk tolerance is high and decrease with ranks when the rate of risk tolerance is lower in the extreme case of risk neutral salespeople the optimal design is a winner take all format we also conclude that since the probability of winning the contest decreases with number of contestants the optimal number of winners should increase and interrank spread decrease when there are a larger number of participants if the firm does not allocate a large enough budget for salespeople to participate in the effort maximizing sales contest then the firm may increase the number of winners to more than half the sales force increasing the number of winners and decreasing the spread are required to encourage the salespeople to participate particularly when there are many participants who are risk averse a counterintuitive result is that the number of winners should be reduced and the spread increased when sales uncertainty is high increasing sales uncertainty leads to lower equilibrium effort levels while keeping the expected utility of the contest rewards the same therefore increased uncertainty results in higher participation incentive the firm should thus relatively reduce the number of winners in high uncertainty situations under the assumption of uniformly distributed sales the recommendation is that a winner take all contest induces maximum efforts regardless of the level of risk aversion number of players or the degree of uncertainty when the winner take all format does not meet the participation constraint our analysis recommends offering a big reward to the top salesperson and a small reward to many other sales people the small reward should be just sufficient to ensure that all salespeople participate consistent with logistic distribution the spread should decrease when salespeople are more risk averse or there are more players but should increase when sales uncertainty is larger these results highlight that some of the conclusions drawn may be sensitive to distributional assumptions

optimal incentives for teams much of the existing theory of incentives describes a static relationship that lasts for just one transaction this static assumption is not only unrealistic but the resulting predictions appear to be at odds with many work organizations the current paper introduces possible long term interaction among agents and studies how the design of explicit incentives and work organizations can exploit and interact with the implicit incentives generated by the repeated interaction of the agents the optimal incentive scheme is shown to display observed features of the increasingly popular teams such as the use of low powered group incentives