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.

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

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

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

An experimental test of the deterrence hypothesis

Crime has to be punished, but does punishment reduce crime? We conduct a neutrally framed laboratory experiment to test the deterrence hypothesis, namely that crime is weakly decreasing in deterrent incentives, i.e. severity and probability of punishment. In our experiment, subjects can steal from another participant's payoff. Deterrent incentives vary across and within sessions. The across subject analysis clearly rejects the deterrence hypothesis: except for very high levels of incentives, subjects steal more the stronger the incentives. We observe two types of subjects: selfish subjects who act according to the deterrence hypothesis and fair-minded subjects for whom deterrent incentives backfire

Teacher Incentives

Advocates of teacher incentive programs argue that they can strengthen weak incentives, while opponents argue they lead to teaching to the test.' We find evidence that existing teacher incentives in Kenya are indeed weak, with teachers absent 20% of the time. We then report on a randomized evaluation of a program that provided primary school teachers in rural Kenya with incentives based on students' test scores. Students in program schools had higher test scores, significantly so on at least some exams, during the time the program was in place. An examination of the channels through which this effect took place, however, provides little evidence of more teacher effort aimed at increasing long-run learning. Teacher attendance did not improve, homework assignment did not increase, and pedagogy did not change. There is, however, evidence that teachers increased effort to raise short-run test scores by conducting more test preparation sessions. While students in treatment schools scored higher than their counterparts in comparison schools during the life of the program, they did not retain these gains after the end of the program, consistent with the hypothesis that teachers focused on manipulating short-run scores. In order to discourage dropouts, students who did not test were assigned low scores. Program schools had the same dropout rate as comparison schools, but a higher percentage of students in program schools took the test.

Executive Compensation and CEO Equity Incentives in China’s Listed Firms (CRI 2009-006)

This study investigates the economic, ownership and governance determinants of executive compensation and CEO equity incentives in China’s listed firms. Consistent with the agency theory, we find that executive compensation is positively correlated with firm size, performance, and growth opportunities. CEO incentives are negatively associated with firm size, positively linked with firm performance and growth opportunity. Firm risk has a negative effect on pay and incentives. Compensation and CEO incentives are significantly greater in privately-controlled firms compared to state-run firms and are lower in firms with concentrated ownership structures. Boardroom governance is important: firms with compensation committees or a greater fraction of independent directors on the board have higher executive pay and greater CEO equity incentives

Playing Hardball: Relationship Banking in the Age of Credit Derivatives

This paper develops a contracting framework in order to explore the effects of credit derivatives on banks’ incentives to monitor loans, their incentives to intervene, and, ultimately, borrowers’ incentives to perform. We show that (i) credit derivatives with short term maturity strengthen incentives to intervene, incentives to monitor, and managerial incentives to perform; (ii) while credit derivatives with long term maturity weaken incentives to intervene, intervention incentives can be maintained by sourcing more short term credit insurance; (iii) long term credit insurance nevertheless weakens managerial incentives through a dilution effect. These findings suggest that properly designed credit derivatives strengthen monitoring incentives and result in efficiency gains, rather than impeding economic efficiency.

The Effects of Fiscal Incentives for R & D in Spain

This paper explores the effect of fiscal incentives for R&D on innovation. Spain is considered one of the most generous countries in the OECD in fiscal treatment of R&D, yet our data reveal that tax incentives are little known and, especially, seldom used by firms. Restricting our empirical analysis to those firms that do report knowing about such incentives, we investigate the average effect of tax incentives on innovation, using both nonparametric methods (matching estimators) and parametric methods (Heckman’s two-step selection model with instrumental variables). First, we find that large firms, especially those that implement innovations, are more likely to use the tax incentives, while small and medium enterprises (SMEs) encounter some obstacles to using them. Secondly, the average effect of the policy is positive, but significant only in large firms. Our main conclusion is that tax incentives increase innovative activities by large and high-tech sector firms, but may be used only randomly by SME