Robust Incentives

In this paper we consider a moral hazard problem, in which the agent after receiving his wage contract but before undertaking the costly effort can borrow on his future wage earnings. The game between the agent and potential lenders is modelled as an infinite stochastic game with an exogenous stopping probability. We show that the principal cannot design a wage scheme that is robust to hedging by the agent. In particular, we show that, if the exogenous stopping probability is non zero, the principal's wage offer will be followed by several rounds of borrowing by the agent. This is compared to the recontracting-proofness equilibria which most of the literature has concentrated on, assuming that this stopping probability is zero. Furthermore, we show that the equilibrium of the model with a strictly positive stopping probability does not converge to the equilibrium of the model in which it is zero. We also find that the principal's profit is lower, the maximum wage payment can be higher and effort is lower

Teacher Incentives

This paper considers hidden teacher effort in educational production and discusses the implications of multiple teacher effort dimensions on optimum incentive contracts in a theoretical framework. The analysis of educational production in a multitask framework is a new and unique contribution of this paper to the economics of education. We first characterize the first-best and second-best outcomes. The model is extended to address specific questions concerning teacher incentive schemes: We compare input- to output-based accountability measures and study the implication of the level of aggregation in performance measures. Against the background of the empirical evidence on the effectiveness of teacher incentives, we argue that performance measures should be as broad as possible. Further, we present the optimum contract for motivated teachers. Finally, if education is produced in teacher teams, we establish the conditions for optimum team-based and individual incentives: The larger the spillover effects across teacher efforts and the better the measurability of educational achievement, the stronger the case for team-based incentives

Incentives for separation and incentives for public good provision

In this paper I examine the incentives of regions to unite, to separate and to provide public goods. Separation allows for greater influence over the nature of political decision making while unification allows regions to exploit economies of scale in the provision of public goods. When public good provision is relatively inexpensive, separation occurs since individuals want to assert greater influence, while for intermediate costs of public good provision, separation can be explained by the desires for greater influence as well as for more public goods. Compared with the social optimum, there are excessive incentives for public good provision as well as excessive incentives for separation

Incentives

We model organization as the command-and-communication network of managers erected on top of technology (which is modeled as a collection of plants). In our framework, the role of a manager is to deal with shocks that affect the plants that he oversees directly or indirectly. Organizational form is then an instrument for (a) economizing on managerial costs, and (b) providing managerial incentives. We show that two particular organizational forms, the M-form (multi-divisional form) and the U-form (unitary form), are the optimal structures when shocks are sufficiently "big". We argue however that, under certain empirical assumptions, the M-form is likely to be strictly preferable once incentives are taken into account. We conclude by showing that the empirical hypotheses on which this comparison rests are satisfied for Chinese data.

The distributional impact of KiwiSaver incentives

New Zealand’s approach to retirement incomes profoundly changed with the recent introduction of KiwiSaver and its associated tax incentives. Previous policy reduced lifetime inequality but KiwiSaver and its tax incentives will increase future inequality and lead to diverging living standards for the elderly. In this paper we evaluate the distributional effects of these tax incentives. Using data from a nationwide survey conducted by the authors, we estimate the value of the equivalent income transfer provided to individuals by the tax incentives for KiwiSaver participation. Concentration curves and inequality decompositions are used to compare the distributive impact of these tax incentives with those for New Zealand Superannuation. Estimates are reported for both initial and lifetime impacts, with the greatest effect on inequality apparent in the lifetime impacts

Collective Production and Incentives

We analyse incentive problems in collective production environments where contributors are compensated according to their observed and ranked efforts. This provides incentives to the contributors to choose first best efforts

The Effect of External Incentives on Profits and Firm-Provided Incentives Strategy

The article examines the firm's choice of incentives when workers face additional incentives (“external incentives”) to those provided by the firm, such as building reputation that improves the workers' prospects with other employers, or satisfaction from working well. Surprisingly, the firm might find it optimal to increase the incentives it provides following an increase in external incentives. Even if the firm reduces its incentives, however, total incentives unambiguously increase, leading to higher effort and profits. This implies that firms should try to increase the external incentives that their workers face; I suggest several ways firms can do so.Worker satisfaction; Personnel economics; External incentives; Worker reputation; Intrinsic motivation

Commercial Incentives in Academia

This paper investigates the effects of monetary rewards from commercialisation on the pattern of research. We build a simple repeated model of a researcher capable to obtain innovative ideas. We analyse how academic and market incentives affect the allocation of the researcher’s time between research and development. We argue, however, that technology transfer objectives also affect the choice of research projects. Although commercialisation incentives reduce the time spent in research, they might also induce researchers to conduct research that is more basic in nature, contrary to what the “skewing problem” would presage. Monetary rewards induce a more intensive search for (ex-post) path-breaking innovations, which are more likely to be generated through (ex-ante) basic research programs. These results are shown to hold even if development delays publication

Real Effort, Real Leisure and Real-time Supervision: Incentives and Peer Pressure in Virtual Organizations.

We propose a novel approach to the analysis of organizations by developing a computerized platform that reproduces relevant features of existing organizations such as real-effort tasks and real-leisure alternative activities (Internet). In this environment, we find strong incentives effects as organizations using individual incentives significantly outperform those relying on team incentives. Combining real-time peer monitoring with team incentives, we report striking evidence of positive peer effects as production increases by 50% and Internet usage decreases by 54% compared with organizations using team incentives alone. Peer monitoring allows virtual organizations using team incentives to perform as well as those using individual incentives. However, the positive effect of peer monitoring does not apply to low performers.team incentives, free-riding, monitoring, peer pressure, virtual organization