Reining in Excessive Risk Taking by Executives : Experimental Evidence

Compensation of executives by means of equity has long been seen as a means to tie executives' income to company performance, and thus as a solution to the principal-agent dilemma created by the separation of ownership and management in publicly owned companies. The overwhelming part of such equity compensation is currently provided in the form of stock-options. Recent events have however revived suspicions that the latter may induce excessive risk taking by executives. In an experiment, we find that subjects acting as executives do indeed take risks that are excessive from the perspective of shareholders if compensated through options. Comparing compensation mechanisms based on stock-options to long-term stock-ownership plans, we find that the latter significantly reduce the uptake of excessive risks by aligning the executives' interests with those of shareholders. Introducing an institutionalized accountability mechanism consisting in the requirement for executives to justify their choices in front of a shareholder reunion also reduces excessive risk taking, and appears to be even more effective than long-term stock-ownership plans. A combination of long-term stock-ownership plans and increased accountability thus seem a promising direction for reining in excessive risk taking by executives.executive compensation ; stock-options ; incentives ; accountability ; risk taking

"Obedient Servant or Runaway Eurocracy? Delegation, Agency, and Agenda Setting in the European Community"

Do supranational institutions matter - do they deserve the status of an independent causal variable - in EC policymaking? Does the Commission matter? Does the European Court of Justice? Does the European Parliament? Is the European Community characterized by continued member state dominance, or by a runaway Commission and an activist Court progressively chipping away at this dominance? These are some of the most important questions for our understanding of the European Community and of European integration, and have divided the two traditional schools of thought in regional integration, with neofunctionalists [Haas 1958; Lindberg & Scheingold 1970] generally asserting, and intergovernmentalists [Hoffmann 1966; Taylor 1983; Moravcsik 1991, 1993] generally denying, any important causal role for supranational institutions in the integration process. By and large, however, neither neofunctionalism nor intergovernmentalism1 has generated testable hypotheses regarding the conditions under which, and the ways in which, supranational institutions exert an independent causal influence on either EC governance or the process of European integration. This paper presents a unified theoretical approach to the problem of supranational influence, based largely on the new institutionalism in rational choice theory. Simplifying only slightly, this new literature can be traced to Shepsle's [1979] pioneering work on the role of institutions in the US Congress. Beginning with the observation by McKelvey [1976], Riker [1980] and others that, in a system of majoritarian decisionmaking, policy choices are inherently unstable, "cycling" among multiple possible equilibria, Shepsle argued that Congressional institutions, and in particular the committee system, could produce structure-induced equilibrium, by ruling some policy alternatives as permissible or impermissible, and by structuring the voting and veto power of the various actors in the decisionmaking process

Personality Psychology and Economics

This paper explores the power of personality traits both as predictors and as causes of academic and economic success, health, and criminal activity. Measured personality is interpreted as a construct derived from an economic model of preferences, constraints, and information. Evidence is reviewed about the "situational specificity" of personality traits and preferences. An extreme version of the situationist view claims that there are no stable personality traits or preference parameters that persons carry across different situations. Those who hold this view claim that personality psychology has little relevance for economics. The biological and evolutionary origins of personality traits are explored. Personality measurement systems and relationships among the measures used by psychologists are examined. The predictive power of personality measures is compared with the predictive power of measures of cognition captured by IQ and achievement tests. For many outcomes, personality measures are just as predictive as cognitive measures, even after controlling for family background and cognition. Moreover, standard measures of cognition are heavily influenced by personality traits and incentives. Measured personality traits are positively correlated over the life cycle. However, they are not fixed and can be altered by experience and investment. Intervention studies, along with studies in biology and neuroscience, establish a causal basis for the observed effect of personality traits on economic and social outcomes. Personality traits are more malleable over the life cycle compared to cognition, which becomes highly rank stable around age 10. Interventions that change personality are promising avenues for addressing poverty and disadvantage.personality, behavioral economics, cognitive traits, wages, economic success, human development, person-situation debate

Inefficiencies in Digital Advertising Markets

Digital advertising markets are growing and attracting increased scrutiny. This article explores four market inefficiencies that remain poorly understood: ad effect measurement, frictions between and within advertising channel members, ad blocking, and ad fraud. Although these topics are not unique to digital advertising, each manifests in unique ways in markets for digital ads. The authors identify relevant findings in the academic literature, recent developments in practice, and promising topics for future research

Lab Labor: What Can Labor Economists Learn from the Lab?

This paper surveys the contributions of laboratory experiments to labor economics. We begin with a discussion of methodological issues: why (and when) is a lab experiment the best approach; how do laboratory experiments compare to field experiments; and what are the main design issues? We then summarize the substantive contributions of laboratory experiments to our understanding of principal-agent interactions, social preferences, union-firm bargaining, arbitration, gender differentials, discrimination, job search, and labor markets more generally.personnel economics, principal-agent theory, laboratory experiments, labor economics

Designing effective contracts within the buyer-seller context: a DEMATEL and ANP study

This study examines the factors that contribute to effective contract design within the context of buyer-seller relationship. Research streams on contract factors, supply chain factors, environmental factors, and competitive factors were reviewed to arrive at 18 contract factors. A hybrid model of Decision-Making Trial and Evaluation Laboratory (DEMATEL) and Analytic Hierarchy Process (ANP) analysed empirical data collected from 17 experts to weight the importance of contract factors. It was found that most important factors are, in order of significance: policies, supplier technology, force majeure, formality, relationship learning, buyer power, legal actions, liquidated damages, supplier power and partnership

Review of \u3cem\u3eEconomics Imperialism versus Multidisciplinarity\u3c/em\u3e

This paper examines the implications of Chicago School economist Edward Lazear’s 2000 defense of economics imperialism using standard trade theory. It associates that defense with interdisciplinarity or the idea that the sciences are relatively autonomous, but treats this defense as a mask for a more conventional imperialist strategy of promoting Chicago School neoclassicism. Lazear’s argument actually created a dilemma for Chicago regarding how it could espouse interdisciplinarity while operating in a contrary way. I argue that the solution to this dilemma was for neoclassicism to rebuild economics imperialism around neoclassicism as a theory that sees the world in its own image in a performative manner. This strategy, however, suffers from a number of problems, which upon examination ultimately lead us to multidisciplinarity or the idea that the sciences can have transformative effects on one another. This latter conception can be associated with a complexity economics approach as an alternative view of the relation between the sciences. The paper argues that this view provides a basis for pluralism in economics