learning and wage dynamics we develop a dynamic model of learning about worker ability in a competitive labor market the model produces three testable implications regarding wage dynamics 1 although the role of schooling in the labor market s inference process declines as performance observations accumulate the estimated effect of schooling on the level of wages is independent of labor market experience 2 timeinvariant variables correlated with ability but unobserved by employers such as certain test scores are increasingly correlated with wages as experience increases and 3 wage residuals are a martingale we present evidence from the nlsy that is broadly consistent with the model s predictions

the disaggregation of corporations selective intervention high powered incentives and molecular units a vast array of organizational innovations and changes are transforming us corporations large firms have dramatically downsized refocused and vertically disaggregated they increasingly obtain goods and services pursue complex development efforts and exploit horizontal synergies without the aid of formal hierarchy large firms are also internally disaggregating into smaller more autonomous units that are treated much like external subcontractors the authors argue that these organizational innovations share an important underlying commonalty economic activity is converging toward exchange involving either internal within firm or external between firm networks of small autonomous production or service units small units and small firms have become the basic building block the molecular units of these new forms further exchange among the small autonomous units is commonly a mix of both market like and hierarchical features the authors develop a theoretical explanation for these trends the

collusion and discrimination in organizations abstract in a principal multi agent setting we investigate how optimal contracts should be modified under relative performance evaluation when agents collude agents may write side contracts which are not contingent on their effort choices but indirectly control them through side transfers we show that the optimal collusion proof contract is to introduce a discriminatory policy in the sense that the wage schemes offered to agents depend on their identities even if they are identical with respect to productive abilities such discriminatory wage schemes explain the organizational strategy of divide and conquer as an optimal response to collusion

risk allocation and the costs and benefits of public private partnerships we study the agency costs of delegated public service provision focusing on the link between organizational forms and uncertainty at project implementation we consider a dynamic multitask moral hazard environment where the mapping between efiort and performance is ex ante uncertain but new information may come along during operations our analysis points out at the e ciency gains that bundling planning and implementation as under public private partnerships can bring in terms of better project design and lower operational costs bundling also results in increasingly better performance as uncertainty is reduced by growing experience in the sector bundling should instead be viewed with caution when the private sector seeks to radically innovate on public service provision or to introduce new services but lacks the knowledge and expertise to anticipate the impact of the innovative design procedure technology on the cost of operations the compounding of asymmetric information ex post plus moral hazard and renegotiation may generate diseconomies of scope in agency costs which for high operational risk can make unbundling optimal in this context the use of private flnance can help re establishing the beneflt of bundling only if lenders have su cient expertise to help assessing project risks

limited intertemporal commitment and job design abstract the paper shows that some of the guidelines for job design that emerge from a static analysis of the multitask agency problem can be overturned in a dynamic model with limited commitment static analyses have shown that it is optimal to assign workers sole responsibility for tasks and to allocate them tasks which are as homogeneous as possible with respect to the ease of measuring performance our dynamic analysis demonstrates that it can instead be optimal to make workers jointly responsible for tasks and to make their task portfolios as similar to one another but as internally diverse as possible

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

collusion under asymmetric information when applied to groups the revelation principle postulates a bayesian nash behavior between agents their binding agreements are unenforceable or the principal can prevent them at no cost we analyze instead a mechanism design problem in which the agents can communicate between themselves and collude under asymmetric information we characterize the set of implementable collusion proof contracts both when the principal offers anonymous and nonanonymous contracts after having isolated the nexi and the stakes of collusion we proceed to a normative analysis perform some comparative statics discuss our concept of collusion proofness and provide some insights about transaction costs in side contracting

collusion and renegotiation in a principal supervisor agent relationship this paper describes a principal agent relationship with a supervisor who has information about the agent the agent and the supervisor have the possibility to collude and misinform the principal from the literature we know that there exists an optimal contract which excludes collusion in equilibrium the optimal contract however is ex post inefficient and creates scope for renegotiation if renegotiation is allowed then under some parameter constellations the optimal contract is a contract which necessarily induces collusion the paper thus shows that the principal s behavior toward ex post inefficiencies may determine whether collusion occurs in equilibrium

coordination of internal supply chains in vertically integrated high tech manufacturing organizations htmos abstract this paper uses economic mechanisms to coordinate supply chains within high tech manufacturing organizations htmos it models the one shot initial production and allocation decisions involved in the production and marketing of new technologies these decisions are driven by the economic objectives of the firm and of the employees with private information the experts it analyzes and compares the efficiency of three coordination policies centralized command and control centralized revelation and decentralized revelation it shows that decentralized policies introduce an additional cost and it proposes rules of thumb for coordinating supply chains within firms that use many experts

contracting theory and accounting abstract this paper reviews agency theory and its application to accounting issues i discuss the formulation of models of incentive problems caused by moral hazard and adverse selection problems i review theoretical research on the role of performance measures in compensation contracts and i compare how information is aggregated for compensation purposes versus valuation purposes i also review the literature on communication including models where the revelation principle does not apply so that nontruthful reporting and earnings management can take place the paper also discusses capital allocation within firms including transfer pricing and cost allocation problems

collective organizations versus relative performance contracts inequality risk sharing and moral hazard abstract this paper studies collective economic organizations that share risk and mitigate moral hazard and compares them with relative performance contracts information constrained optimal distributions of organizations and contracts are shown to be functions of the underlying primitives in particular the distribution of pareto weights and hence degree of inequality internal inequality of a potential local group is a force for collective organization that is multi agent organizations exist in order to extract wealth from some but not necessarily all members the group organization is also shown to be information constrained pareto optimal at extremes of local wealth relative to an outsider but the group organization is susceptible to both agents simultaneously deviating colluding against the outsider and this distortion makes an individualistic relative performance contract an attractive alternative more generally organizations contracts and allocations are jointly determined these implications could be distinguished in cross sectional time series data journal of economic literature classification numbers d70 d82

subjective performance measures in optimal incentive contracts objective measures of performance are seldom perfect in response incentive contracts often include important subjective components that mitigate incentive distortions caused by imperfect objective measures this paper explores the combined use of subjective and objective performance measures in respectively implicit and explicit incentive contracts naturally objective and subjective measures often are substitutes sometimes strikingly so we show that if objective measures are sufficiently close to perfect then no implicit contracts are feasible because the firm s fallback position after reneging on an implicit contract is too attractive we also show however that objective and subjective measures can reinforce each other if objective measures become more accurate then in some circumstances the optimal contract puts more weight on subjective measures because the improved objective measures increase the value of the ongoing relationship and so reduce the firm s incentive to renege we also analyze the use of subjective weights on objective performance measures and provide case study evidence consistent with our analyses

information extraction and norms of mutual protection abstract we study a class of moral hazard economies in which a principal interacts with several agents in these economies first best allocations can be implemented via full information extraction when side trades between agents can be restricted when instead side trades cannot be restricted the ability of the principal to extract information from the agents is severely hampered in this context side trades take the form of informal contracts which can be directly interpreted as norms of mutual protection which are indeed quite common among extended family members as well as inside various social political and religious groups

why people don t take their concerns about fair trade to the supermarket the role of neutralisation this article explores how neutralisation can explain people s lack of commitment to buying fair trade ft products even when they identify ft as an ethical concern it examines the theoretical tenets of neutralisation theory and critically assesses its applicability to the purchase of ft products exploratory research provides illustrative examples of neutralisation techniques being used in the ft consumer context a conceptual framework and research propositions delineate the role of neutralisation in explaining the attitude behaviour discrepancies evident in relation to consumers ft purchase behaviour providing direction for further research that will generate new knowledge of consumers ft purchase behaviour and other aspects of ethical consumer behaviour

multiperiod wage contracts and productivity profiles when creditors do not honor human capital as collateral firms can mediate financially by offering workers long term wage contracts the optimal contract specifies a wage consisting of a spot general skill component plus a component equal to the expected time averaged value of the worker s specific skills with a competitor variations in the smoothed specific component are due only to changes in expectations about the likelihood of quitting a competing firm the theory also explains interindustry disparities in wage paths and statistical discrimination by firms

toward an economic model of the japanese firm i owe a great deal to professor moses abramovitz who suggested that i write this article i appreciate his constant encouragement and guidance which aided me throughout its preparation i am also indebted to three anonymous referees of the journal and to professors ryutaro komiya and michael riordan for their critical comments and helpful suggestions needless to say i am solely responsible for the views expressed in this paper

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

worth waiting for delayed compensation training and turnover in the united states and japan this article utilizes a rich data set on workers and their employers in the united states and japan to test several predictions of human capital theory the data set incorporates both prospective and retrospective measures of turnover includes multiple measures of training and provides a basis for calculating plant specific returns to tenure contrary to human capital theory there is no evidence that establishments with high levels of training have either high returns to tenure or low levels of turnover surprisingly establishments with high returns to tenure do not have low levels of turnover

positive and negative antecedents of purchasing eco friendly products a comparison between green and non green consumers this study aims to analyze what drives and prevents the purchasing of eco friendly products across different consumer groups and develops a conceptual model embracing the positive altruistic care for the environmental consequences of purchasing positive ego centric green self identity and moral obligation and negative ego centric perceived personal inconvenience of purchasing eco friendly products antecedents of eco friendly product purchase intention and behavior we empirically validate the conceptual model for green n 453 and non green n 473 consumers i e consumers who engage in a set of pro environmental behaviors for environmental reasons versus consumers who do not engage in these behaviors data are analyzed using structural equation modeling and multi group analysis of the two groups the results confirm the relevance of the determining factors in the model and show significant differences in eco friendly product purchasing patterns between green and non green consumers altruistic motives are more important for green than for non green consumers negative ego centric motives affect the purchase intentions of non green consumers more than the intentions of green consumers whereas the impact of negative motives on behavior is stronger for green than for non green consumers the first contribution of this paper is the development and testing of a parsimonious model of eco friendly products purchasing that embraces both positive altruistic and ego centric and negative ego centric antecedents which have been theoretically suggested in the past but have rarely been empirically tested together the second contribution of this study is that it develops insight into the specific antecedents of eco friendly products purchasing for green and non green consumers to assess potential similarities and differences in eco friendly products purchasing process the hypothesized antecedents their impact on eco friendly products purchase intention and behavior and the intention behavior relation

promotion turnover and discretionary human capital acquisition this article explores human capital acquisition decisions when job placement helps determine competition for a worker with asymmetric information workers may invest in firm specific capital without long term contracts specific investment increases promotion chances and hence wage competition shifting competition back to a time when firms are symmetrically uninformed if general human capital is the efficient output maximizing investment then an equivalent firm specific investment maximizes expected career wages this is a general result for sellers in second price auctions sellers of labor invest to maximize the expected second highest bidder valuation wage not the winner s expected valuation

the excess sensitivity of layoffs and quits to demand excessive layoffs in bad times and excessive quits in good times both stem from the same weakness in practical employment arrangements the specific nature of worker firm relations creates a situat

up or out contracts a signaling perspective a firm will typically gather information concerning its own workers that is not available to other potential employers while other firms will attempt to reduce this information asymmetry by observing the actions of the initial employer i argue that this process can be important in environments characterized by up or out contracts in that the retention decision can serve as a signal of productivity the article investigates this argument in an environment where up or out contracts are employed because they provide workers with an incentive to accumulate general human capital and where learning takes place in a diffuse fashion

joint liability versus individual liability in credit contracts abstract i offer an explanation for the coexistence of joint liability and individual liability microcredit contracts i show that both contracts maximize welfare when credit is rationed due to limited liability but for different borrowers borrowers monitor each other when liability is joint while the lender monitors individual loans joint liability offers poorer borrowers larger loans with less monitoring effort than would have to be exerted by the lender individual liability offers the wealthier among credit constrained borrowers larger loans even without monitoring the theory explains why individual loans serve the wealthier among poor borrowers and are larger and why businesses funded with individual loans grow more

a framework for understanding differences in labor turnover and human capital investment abstract we analyze the causes and the welfare consequences of international differences in labor turnover and human capital investment the framework incorporates different views as special cases conditions are identified under which multiple equilibria or differences in deep economic parameters explain the observed differences in labor practices we show that when there is an informational problem regarding job changing workers quality general human capital like firm specific human capital can also affect labor turnover and that better job matching is obtained at the expense of lower human capital investment given multiple equilibria a high turnover equilibrium is found superior in the pareto sense to a low turnover equilibrium if matching uncertainty is large the reverse is true when matching uncertainty is small

help and factionalism in politics and organizations whether in electoral politics or promotions within organizations players often face the dilemma of whether to enter the contest or to assist other candidates this article analyzes incentives in a rank order tournament when the winner has control over resources that he can distribute to his supporters some players may then be encouraged to help others in exchange for paybacks resulting in factionalism with leaders and supporters sorted by ability the number and the size of factions depend on the reward structure of the contest and the distribution of abilities these implications are corroborated by data on u s gubernatorial primary elections

endogenous groups and dynamic selection in mechanism design abstract we create a dynamic theory of endogenous risk sharing groups with good internal information and their coexistence with relative performance individualistic regimes which are informationally more opaque inequality and organizational form are determined simultaneously numerical techniques and succinct reformulations of mechanism design problems with suitable choice of promised utilities allow the computation of a stochastic steady state and its transitions regions of low inequality and moderate to high wealth utility promises produce the relative performance regime while regions of high inequality and low wealth produce the risk sharing group regime if there is a cost to prevent coalitions risk sharing groups emerge at high wealth levels also transitions from the relative performance regime to the group regime tend to occur when rewards to observed outputs exacerbate inequality while transitions from the group regime to the relative performance regime tend to come with a decrease in utility promises some regions of inequality and wealth deliver long term persistence of organization form and inequality while other regions deliver high levels of volatility

bundling decisions in procurement auctions with sequential tasks abstract this paper investigates the principal s bundling decision during a procurement auction for a project consisting of two sequential tasks in which task externality exists and information arrives sequentially we show that although increasing the number of bidders in the market for the second task always tilts the principal s choice toward unbundling increasing the number of consortiums that can perform both tasks tilts the principal s preference toward bundling if the externality is negative

beneficial collusion in corruption control the case of nonmonetary penalties abstract we analyze a corruption model where a principal seeks to control an agent s corruption by supplementing a costless noncollusive outside detector such as the media with a collusive internal supervisor the principal s objective is to minimize the overall costs made up of enforcement costs and social costs of corruption if the penalties on the corrupt agent and a failing supervisor are nonmonetary in nature and yet the two parties can engage in monetary side transfers the principal may stand to benefit by allowing supervisor agent collusion this benefit may even prompt the principal to actively encourage collusion by hiring a dishonest supervisor in strict preference over an honest supervisor

multiskilling technical change and the japanese firm worker cooperation with technical change accounts for much of the success of large japanese firms the authors argue t hat this cooperative attitude is due in large part to multiskilling by training workers in more than one job a firm assures its workers th at they will not be made worse off by labor saving innovations in a simple model the authors show that multiskilling leads to an endoge nous distinction between permanent and temporary workers wages that are attached to the worker rather than the job and comparative advantage in process style innovations there is even a role for the company song copyright 1993 by royal economic society

role of linking mechanisms in multitask agency with hidden information we investigate the adverse selection problem where a principal delegates multiple tasks to an agent we characterize the virtually implementable social choice functions by using the linking mechanism proposed by jackson and sonnenschein 2007 that restricts the message spaces the principal does not require any incentive wage schemes and can therefore avoid any information rent and welfare loss we show the resemblance between the functioning of this message space restriction and that of incentive wage schemes we also extend the results of the single agent model to the multi agent model

the effect of job heterogeneity on reservation wages this paper develops a model of job search in which jobs differ in the amount of inspection and experience uncertainty under these circumstances reservation wages may not remain constant or decrease over an unemployment spell even if job offer rates are constant over an unemployment spell negative duration dependence of the reemployment hazard can occur when individuals search amongst a variety of jobs since this duration dependence is a result of time varying unobserved heterogeneity conventional methods for controlling for unobserved heterogeneity in reduced form hazard models are inappropriate copyright 1994 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

to build or not to build normative and positive theories of public private partnerships abstract this paper analyzes whether the two tasks of building infrastructures which are socially useful in providing public services and managing these assets should be bundled or not when performance contracts can be written both tasks should be performed altogether by the same firm if a better design of the infrastructure helps also to save on operating costs otherwise tasks should be kept apart and undertaken by different units in incomplete contracting environments we isolate conditions under which either the traditional form of public provision of services or the more fashionable public private partnership emerges optimally the latter dominates when there is a positive externality and the private benefits from owning assets are small enough finally we take a political economy perspective and study how incentive schemes are modified under the threat of capture of the decision makers much of the gains from bundling may be lost in this case

collusion delegation and supervision with soft information this paper derives an equivalence principle between organizational forms of supervisory and productive activities we consider an organization with an agent privately informed on his productivity and a risk averse supervisor getting signals on the agent s type in a centralized organization the principal can communicate and contract with both the supervisor and the agent however these two agents can collude against the principal in a decentralized organization the principal only communicates and contracts with the supervisor who in turn sub contracts with the agent we show that the two organizations achieve the same outcome we discuss this equivalence and provide various comparative statics results to assess the e ciency of supervisory structures

collusion in organizations the principal agent theory developed in the 1980s has produced a large set of insights for understanding how contracts can be established within organizations this theory explains how a principal who offers a contract to an agent should structure this contract to overcome at least partially the asymmetries of information he faces by now optimal contracts with adverse selection or hidden knowledge with moral hazard or hidden action or with nonverifiability by a third party of some variables known ex post by both the principal and the agent are relatively well understood despite insightful extensions to multiagent or multiprincipal organizations this body of knowledge falls short of a comprehensive theory of organizations one major reason beyond the restrictive nature of the organizations studied lies in the noncooperative approach generally followed to model multiagent settings indeed in this standard paradigm the cooperation of agents desired by the principal can be induced by the contracts he offers to the agents each of them maximizing his own welfare given the behavior of the other agents what remains is that the principal has complete control of the game played by the agents unwanted communication or side contracting between agents can be prevented this is a rather unrealistic assumption contract theory teaches us that the principal structures the contracts so as to minimize the informational rents given up to the agents because of their informational advantages it is quite natural to expect a collective reaction on the part of the agents to protect their rents we need to understand how agents can react to the rules of an organization and beyond to understand how a principal who is aware of the incentives for collusion should design the organization modeling coalitional or collusive behavior and characterizing the regulatory responses to such behavior is a major task of organization theory the empirical relevance of this line of work is easy to establish a clear example is that of auctions for which the occurrence of cooperative behavior between bidders is a general and well documented phenomenon see porter and zona 1993

marketing production decisions in an industrial channel of distribution this paper presents a model that considers the interface between marketing and production decisions in a channel of distribution of industrial goods comprised of a manufacturer and a distributor the key issue investigated is the nature of the coordination within the channel in light of an unstable pattern of seasonal demand the investigation which focuses on dynamic issues considers production activities such as product delivery and inventory policy and their link to marketing strategies such as pricing policies the focus here is on the dynamic nature of the coordinational aspects of the various policies for example the following questions are addressed what is the distributor s pricing strategy throughout the season what is the nature of the contractual price in the channel under what conditions should the distributor carry no inventory throughout the seasonal period under what conditions should the manufacturer carry no inventory what is the impact of the seasonal parameters and differing h

job matching and occupational choice this paper presents a model of job matching the generalizes the existing literature by allowing for different jobs types or occupations such differences affect the value of job specific experience inducing a career profile where certain types are sampled before others more specifically the analysis shows that it is optimal for the young and inexperienced to gravitate toward jobs exhibiting a certain kind of risk then after deriving the equilibrium job turnover rate for an economy in which people do not switch occupations panel data are used to estimate its underlying parameters the hypothesis that people do not switch occupations is rejected against the alternative that they do thus providing empirical support for the theoretical extension undertaken here

powering sustainable consumption the roles of green consumption values and power distance belief as human consumption is one of the key contributors to environmental problems it is increasingly urgent to promote sustainable consumption drawing on the agentic communal model of power this research explores how the psychological feeling of power influences consumers preference for green products we show that low power increases consumers preference for green vs conventional products compared to high power studies 1a and 1b importantly we identify two factors moderating the main effect of power on green consumption specifically we find that the effect of power on green consumption is more salient among those with high green consumption values study 2 in addition the effects of power are dynamic as a function of power distance belief pdb such that low power vs high power promotes green consumption in the low pdb context while high power vs low power promotes green consumption in the high pdb context study 3 taken together these findings provide novel insights into understanding green consumption from the perspectives of social power green values and pdb besides contributing to the literature the findings have significant implications for marketers and policy makers in promoting green campaigns bridging the attitude behavior gap and building a more sustainable society

an investigation of the equal commission rate policy for a multi product salesforce for a multi product sales force the policy of paying commissions as an equal percentage of realized gross margins is shown to be in general nonoptimal from the firm s profit maximization point of view for a homogeneous salesforce the nonoptimality results from the fact that earlier research while taking into account the effect of commission rates on a salesperson s allocations of total time to the multiple products has not incorporated the effect of commission rates on salesperson s total selling time resulting from his her trading off income vs total time to maximize utility the equal commission rate policy is however optimal for the cases of i salesperson with a fixed total selling time and a minimum income requirement and ii fair income salesperson whose total selling time is merely a function of income and not based on rate of change of income as in the utility maximization case if the salesforce is heterogeneous e g different salespersons have differing sales responses to selling time this makes the equal commission rate policy to be in general nonoptimal even for the restrictive cases i and ii it is suggested that the commission rates be set higher for products with greater elasticities relating quantities sold to selling times the common practice of paying commissions as a percentage of total dollar sales rather than gross margins is shown to be optimal under certain assumptions

uncertainty in labor productivity and specific human capital investment uncertainty in labor productivity ulp is affected by many factors such as worker employer matching technology and macroeconomic conditions not surprisingly ulp varies across firms industries and economies how do variations in ulp affect specific human capital shc investment wage and labor turnover a fixed wage model is used to show that the answer depends critically on the initial level of ulp the model is also used to show that wage and shc are always positively correlated but shc investment and labor turnover do not have a monotonic relationship these results have implications for empirical studies and public policies affecting ulp

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

salesforce compensation plans in environments with asymmetric information in this paper we present a theory of salesforce compensation plans to provide insights into why it may be advantageous for a profit maximizing firm to offer members of its salesforce the opportunity to choose from a menu of compensation plans although such contractual arrangements are not commonly used in the industry they have been introduced and implemented by firms such as ibm and st regis paper as in our previous work on salesforce compensation plans basu lal srinivasan and staelin basu a k r lal v srinivasan r staelin 1985 salesforce compensation plans an agency theoretic perspective marketing sci 4 fall 267 291 we use an agency theory framework in this paper we relax the assumptions of information symmetry and salesforce homogeneity and show the conditions under which it is optimal to offer a menu of compensation plans we also show that even when these assumptions are relaxed there are situations where offering a single plan characterized by basu lal srinivasan and staelin basu a k r lal v srinivasan r staelin 1985 salesforce compensation plans an agency theoretic perspective marketing sci 4 fall 267 291 is still optimal insights gained from the analyses are discussed in the context of an existing compensation scheme

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

asymmetric information incentives and intrafirm resource allocation this paper considers the question how should a firm allocate a resource among divisions when the productivity of the resource in each division is known only to the division manager obviously if the divisions as represented by their managers are indifferent among various allocations of the resource the headquarters can simply request the division managers to reveal their private information on productivity knowing that the managers have no incentive to lie the resource allocation problem can then be solved under complete or at least symmetric information this aspect is a flaw in much of the recent literature on this topic i e there is nothing in the models considered which makes divisions prefer one allocation over another thus although in some cases elaborate allocation schemes are proposed and analyzed they are really unnecessary in the model we develop a division can produce the same output with less managerial effort if it is allocated more resources and effort is costly to the manager we further assume that this effort is unobservable by the headquarters so that it cannot infer divisional productivity from data on divisional output and managerial effort given these assumptions we seek an optimal resource allocation process our results show that certain types of transfer pricing schemes are optimal in particular if there are no potentially binding capacity constraints on production of the resource then an optimal process is for each division to choose a transfer price from a schedule announced by the headquarters division managers receive a fixed compensation minus the cost of the resource allocated to them at the chosen transfer price resources are allocated on the basis of the chosen transfer prices if there is a potentially binding constraint on resource production a somewhat more complicated but similar scheme is required

strategic aspects of vertical delegation abstract this paper offers an overview of the strategic aspects of situations where either institutionally or contractually a firm delegates some of its decisions to another firm a subsidiary an internal division etc delegation may have several kinds of strategic benefits in the short term it may improve the competitive position of the firm or induce a more lenient behavior from its competitors in the long run it may be used to deter the entry of potential competitors to foreclose market access or to induce actual competitors to exit the paper analyzes the trade off between these possible benefits and the agency costs of delegation and emphasizes the key issues of credibility and commitment

the layoff rat race we investigate how discretionary investments in general and specific human capital are affected by the possibility of layoffs after investments are made firms may have to lay off workers and will do so in inverse order of the profit that each worker generates greater skill investments especially in specific human capital contribute more to a firm s bottom line so that workers who make those investments will be laid off last we show that as long as workers bargaining positions are not too weak workers invest in specific human capital in order to reduce layoff probabilities indeed workers over invest in skill acquisition from a social perspective whenever their bargaining power is strong enough even though they only receive a share of any investment more generally we characterize how equilibrium skill investments are affected by the distribution of worker abilities within firms the probability that a firm will downsize and the distribution of employment opportunities in the economy

on manufacturing marketing incentives stereotypically marketing is mainly concerned about satisfying customers and manufacturing is mainly interested in factory efficiency using the principal agent agency paradigm which assumes that the marketing and manufacturing managers of the firm will act in their self interest we seek incentive plans that will induce those managers to act so that the owner of the firm can attain as much as possible of the residual returns one optimal incentive plan can be interpreted as follows the owner subcontracts to pay the manufacturing manager a fixed rate for all capacity he delivers each marketing manager receives all of the returns from his product in turn all managers pay a fixed fee to the owner under this plan the marketing managers will often complain about the stock level decisions even though these levels are announced in advance under a revised plan the owner can eliminate such complaints by delegating the stocking decisions to the respective marketing managers without any loss this plan is interpreted as requiring the owner to make a futures market for manufacturing capacity paying the manufacturing manager the expected marginal value for each unit of capacity delivered receiving the realized marginal value from the marketing managers and losing money on average in the process

a model for fair trade buying behaviour the role of perceived quantity and quality of information and of product specific attitudes in a sample of 615 belgians a model for fair trade buying behaviour was developed the impact of fair trade knowledge general attitudes towards fair trade attitudes towards fair trade products and the perception of the quality and quantity of fair trade information on the reported amount of money spent on fair trade products were assessed fair trade knowledge overall concern and scepticism towards fair trade and the perception of the perceived quantity and quality of fair trade information influence buying behaviour directly and indirectly through product attitudes interest in fair trade products price acceptability and product liking have a significant impact on fair trade buying behaviour product interest is the most important variable influencing buying behaviour implications for the campaigns of governments and for the marketing strategy of fair trade organisations are offered

correlation and relative performance evaluation this paper reexamines the issue of relative versus joint incentive schemes in a multi agent moral hazard framework the model allows a full analysis of the information and dependence structure an important result is that the widespread notion that greater correlation in outcomes calls for more competition is not robust first when the dependence structure is effort sensitive the optimal incentive scheme in general mixes elements of relative evaluation and joint evaluation second under limited liability higher equilibrium correlation tends to make joint performance evaluation more desirable examples are provided regarding incentives in firms finance and innovation

cooperation and competition in organizations a dynamic perspective abstract in static principal agent relationships cooperation and competition among agents both yield higher welfare than independent compensation both modes of job design improve the tradeoff between risk and explicit incentives in dynamic settings welfare is also affected by implicit incentives in particular the ratchet effect i characterize the effects of job design decisions on implicit incentives showing that they differ in nature from explicit incentive effects and may be the dominant ones even if a decision about job design improves the static risk incentive tradeoff it may worsen the ratchet effect by so much that welfare falls

decentralization and collusion abstract we consider a model where agents work in sequence on a project share information not available to the principal and can collude due to limited liability the coase theorem does not apply the distribution of surplus among the agents is therefore an important control variable for the principal which gives us a theory of how to delegate in an organization subject to moral hazard the optimal distribution of surplus can always be achieved by delegating in the right way decentralization without using message games journal of economic literature classification numbers d23 d82 l14 l22

employee buyout in a bargaining game with asymmetric information why are some firms purchased by their employees this paper explores this question theoretically suggesting that employees may attempt to overcome their informational handicap regarding firm profitability by making simultaneous offers on wages and a purchase price for the firm owners of relatively unprofitable firms will tend to sell out for low prices instead of paying high wages whereas owners of profitable firms will prefer to pay high wages over receiving low firm prices the buyout serves as a screening mechanism the probability of an employee buyout decreases with the employees outside options and increases with owners outside options copyright 1996 by american economic association

contracts under wage compression a case of beneficial collusion this paper considers a principal agent model with adverse selection and limited wage discrimination under wage compression an agent may have an incentive to free ride on other agents by manipulating his private information when collusion among the agents is not possible the principal distorts the output schedule to reduce information rent associated with the free riding opportunity under collusion however the principal can reduce the information rent by inducing side contracts among the agents thus partly removing the distortion in the output schedule we show that side contracts among the agents take place in equilibrium and that the prospect of collusion is beneficial

product warranties and double moral hazard this article explores a model of warranties in which moral hazard problems play a key role the goal is to understand the important characteristics of warranties including their provision of incomplete insurance and the relationship between product quality and coverage we analyze a model in which buyers and sellers take actions that affect a product s performance since these actions are not cooperatively determined an incentives problem arises we characterize the optimal warranty contract and undertake comparative statics to determine the predicted correlation of warranty coverage and product quality

collusion and biased tournaments abstract tournaments are vulnerable to collusion this paper finds that biased tournaments can be more effective at preventing collusion than unbiased ones when agents can collude to exert low effort introducing some bias into tournaments generates opposite effects on favored and disfavored agents respective incentives to exert high effort and provides strong incentives for the favored agent to deviate from collusion introducing an adequate degree of bias reduces the principal s incentive cost for preventing collusion however granting excessive bias instead increases the incentive cost we show that the optimal level of bias can be endogenously determined

from high school to work market and institutional mechanisms in japan market models posit that institutional linkages interfere with efficient labor markets many japanese high schools have agreements with employers to hire their students and this article examines the ties between japanese schools and employers the reasons they make these ties and the criteria they use to select students interviews with teachers and recruiters indicate that the japanese system shifts the competition for jobs from the labor market into schools and among schools and employers also compete for dependable sources of labor multivariate analyses of surveys of 1 408 high schools and 964 seniors indicate that desirable jobs are allocated more on the basis of academic than nonacademic criteria contrary to the predictions of some models moreover contrary to a hypothesis that institutional linkages reduce achievement effects achievement has greater effects on jobs with linked employers than on jobs with nonlinked employers institutional linkages differ from both economic market models and f

do consumers care about ethical luxury this article explores the extent to which consumers consider ethics in luxury goods consumption in particular it explores whether there is a significant difference between consumers propensity to consider ethics in luxury versus commodity purchase and whether consumers are ready to purchase ethical luxury prior research in ethical consumption focuses on low value commoditized product categories such as food cosmetics and high street apparel it is debatable if consumers follow similar ethical consumption patterns in luxury purchases findings indicate that consumers propensity to consider ethics is significantly lower in luxury purchases when compared to commoditized purchases and explores some of the potential reasons for this reduced propensity to identify or act upon ethical issues in luxury consumption

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

national vs european incentive policies bargaining information and coordination abstract we build a hierarchical model of contractual relationships under moral hazard to address issues about subsidiarity i e optimal de centralization of incentive industrial policies at the national level or at the european community level incentive policy is viewed as an incentive contract for producers who take unobservable decisions that have spillover effects across member states a community agency designs contracts for producers and contractual compensatory transfers between states on the basis of its observations then national regulators and their home producers negotiate according to a generalized nash bargaining a national contract that complements the community contracts given that national regulators will have access to more observations on the producers activities in this setting we show that full centralization is never optimal we give sufficient conditions for complete decentralization to be optimal and when both policies are present we characterize how they interact to provide incentives to producers

a note on the optimal structure of production abstract we analyze the advantages of centralization and decentralization in industries in which production takes place in several stages and the costs are privately observed by the agents in charge of production we demonstrate that informational diseconomies arise when uncorrelated information is concentrated in the hands of a single agent these diseconomies arise when the stages of production are different activities with different cost supports journal of economic literature classification numbers d82 l22 l51

coalitions incentives and risk sharing abstract this paper analyzes the effects of coalitional behavior in principal multiagent relationships with moral hazard and identifies cases where the principal prefers agents to form a coalition via side contracting it is shown that the principal can implement given efforts via non individualistic incentive contracts at a lower cost when the agents can monitor each other s efforts perfectly and hence coordinate their effort choice than when the agents behave independently permitting the principal to utilize more complex communication mechanisms does not alter the result for there is no coalition proof revelation mechanism improving the principal s welfare journal of economic literature classification number d82

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

the effect of individual uncertainty on the specificity of human capital empirical evidence from career developments in professional soccer this study looks at careers in professional soccer to investigate the determinants of human capital hc specificity inspired by labour market research we formulate three hypotheses on how uncertainty about the usefulness of individuals more productive specific skills affects their investment in more flexible general skills the empirical analysis is based on unique panel data on school grades soccer evaluations and sociodemographic characteristics of 90 elite players from the youth academy of a german bundesliga club we find that senior and long serving players who are comparably certain that their soccer specific capital will be sufficient to pursue a lucrative professional career invest less in general hc at school expected soccer performance in contrast has a counterintuitive positive effect our results expand knowledge on the factors influencing hc specificity from the macro to the subject level and highlight practical implications for institutions that train gifted individuals