Quota bonuses in a principle-agent setting

Theoretical articles on incentive systems almost excusively focus on linear compensations, while in practice, nonlinear elements, eg. quota bonuses are not uncommon. Our article tries to bridge that gap and show how the use of quotas can increase the owners’ profit

The elasticity of intertemporal substitution: new evidence from 401(k) participation

A key parameter in economics is the elasticity of intertemporal substitution (EIS), which measures the extent to which consumers shift total expenditures across time in response to changes in the effective rate of return. In contrast to the previous literature, which primarily has relied on Euler equation methods and generated a wide range of estimates, we show how a life-cycle-consistent econometric specification of employee 401(k) participation along with plausibly exogenous variation in rates of return due to employer matching contributions can be used to generate new estimates of the EIS. Because firms often cap the generosity of the match, employer matching generates nonlinearities in household budget sets. We draw on non-linear budget-set estimation methods rooted in the public economics literature, and using detailed administrative contribution, earnings, and pension-plan data for a sample of 401(k)-eligible households from the Health and Retirement Study, we estimate the EIS to be 0.74 in our richest specification, with a 95% confidence interval that ranges from 0.37 to 1.21.Elasticity (Economic) ; Consumer behavior ; Econometric models

Marginal Deadweight Loss when the Income Tax is Nonlinear

Almost all theoretical work on how to calculate the marginal deadweight loss has been done for linear taxes and for variations in linear budget constraints. This is quite surprising since most income tax systems are nonlinear, generating nonlinear budget constraints. Instead of developing the proper procedure to calculate the marginal deadweight loss for variations in nonlinear income taxes a common procedure has been to linearize the nonlinear budget constraint and apply methods that are correct for variations in a linear income tax. Such a procedure leads to incorrect results. The main purpose of this paper is to show how to correctly calculate the marginal deadweight loss when the income tax is nonlinear. A second purpose is to evaluate the bias in results that obtains when the traditional linearization procedure is used. We perform calculations based on the 2006 US tax system and find that the relative deadweight loss caused by increasing existing tax rates is large but less than half of Feldstein’s (1999) estimates for the 1994 tax system.deadweight loss, taxable income, nonlinear budget constraint

Employer Matching and 401(k) Saving: Evidence from the Health and Retirement Study

Employer matching of employee 401(k) contributions can provide a powerful incentive to save for retirement and is a key component in pension-plan design in the United States. Using detailed administrative contribution, earnings, and pension-plan data from the Health and Retirement Study, this analysis formulates a life-cycle-consistent econometric specification of 401(k) saving and estimates the determinants of saving accounting for non-linearities in the household budget set induced by matching. The participation estimates indicate that an increase in the match rate by 25 cents per dollar of employee contribution raises 401(k) participation by 3.75 to 6 percentage points, and the estimated elasticity of participation with respect to matching ranges from 0.02-0.07. The parametric and semi-parametric estimates for saving indicate that an increase in the match rate by 25 cents per dollar of employee contribution raises 401(k) saving by $400-$700 (in 1991 dollars). The estimated elasticity of 401(k) saving to matching is also small and ranges from 0.09-0.12 overall, with just under half of this effect on the intensive margin. Overall, the analysis reveals that matching is a rather poor policy instrument with which to raise retirement saving.

Employer matching and 401 (k) participation: evidence from the health and retirement study

Employer matching of employee 401(k) contributions can provide a powerful incentive to save for retirement and is a key component in pension-plan design in the United States. Using detailed administrative contribution, earnings, and pension-plan data from the Health and Retirement Study, this analysis formulates a life-cycle-consistent discrete choice regression model of 401(k) participation and estimates the determinants of participation accounting for non-linearities in the household budget set induced by matching. The estimates indicate that an increase in the match rate by 25 cents per dollar of employee contribution raises 401(k) participation by 3.75 to 6 percentage points, and the estimated elasticity of participation with respect to matching ranges from 0.02-0.07. The estimated elasticity of intertemporal substitution is 0.74-0.83. Overall, the analysis reveals that matching is a rather poor instrument with which to raise retirement saving.Saving and investment ; Taxation ; Pensions

Executive compensation : a modern primer

This article studies traditional and modern theories of executive compensation, bringing them together under a unifying framework. We analyze assignment models of the level of pay, and static and dynamic moral hazard models of incentives, and compare their predictions to empirical findings. We make two broad points. First, traditional optimal contracting theories find it difficult to explain the data, suggesting that compensation results from "rent extraction" by CEOs. In contrast, more modern theories that arguably better capture the CEO setting do deliver predictions consistent with observed practices, suggesting that these practices need not be inefficient. Second, seemingly innocuous features of the modeling setup, often made for tractability or convenience, can lead to significant differences in the model's implications and conclusions on the efficiency of observed practices. We close by highlighting apparent inefficiencies in executive compensation and additional directions for future research

Pollution-Reducing and Resource-Saving Technological Progress

In this paper we survey the theoretical literature on both pollution-reducing and resource-saving technological progress. The literature can be divided into two strands. One strand deals with microeconomic models which investigate incentives to adopt and to develop environmentally more friendly technologies for different policy tools and in different economic environments, such as market structure or timing and commitment structures. It turns out that, firstly, price based instruments such as emission taxes and tradable permits perform better than command and control policies, and secondly, that under competitive conditions ex ante end ex post optimal policies are equivalent. Under imperfect market conditions the policy conclusions are more subtile. The second strand of literature deals with both pollution-reducing and resource-saving technological progress within endogenous growth models. Most of these models are characterized by three market imperfections : market power for new (intermediate) products, positive R&D spillovers, and pollution. These imperfections can be mitigated by subsidies on intermediate products, subsidies on R&D effort, and a tax on emissions. Moreover, in most models there occurs a trade-off between the speed of growth and environmental quality. --pollution-reducing technological progress,resource-saving technological progress,environmental innovation,endogenous growth models

Menu Pricing and Learning

We analyze the design of dynamic menus to sell experience goods. The quality of the product is initially unknown, and the total quantity sold in each period determines the amount of information in the market. We characterize the optimum menu as a function of consumers' beliefs, and the dynamic adjustments resulting from the diffusion of information. The firm faces a dynamic trade-off between gains from trade, information production, and information rents. It initially charges lower prices, sacrificing short-term revenue to increase sales. As more information is revealed, prices increase, and low-valuation buyers are excluded, even when the product's quality is high.Carl A. Anderson FellowshipLeylan Fellowship in the Social Science

Sticks and Carrots for the Alleviation of Long Term Poverty

Work requirements can make it easier to screen the poor from the non-poor.They can also affect future poverty by changing the poors' incentive to invest in their income capacity. The novelty of our study is the focus on long term poverty. We find that the argument for using work requirements as a screening device is both strengthened and weakened with long term poverty, and that the possibility of using work requirements weakens the incentives to exert effort to escape poverty. We also show that the two incentive problems, to screen poverty and deter poverty, are interwoven; the fact that the poor can exert an effort to increase their probability of being non-poor in the future makes it easier to separate the poor from the non-poor in the initial phase of the program. Finaly we show that if it is possible to commit to a long term poverty alleviation program it is almost always optimal to impose some work requirements on those that receive transfers.long-term poverty, ratchet effect, moral hazard, screening.

On the Size and Structure of Group Cooperation

This paper examines characteristics of cooperative behavior in a repeated, n-person, continuous action generalization of a Prisoner’s Dilemma game. When time preferences are heterogeneous and bounded away from one, how “much” cooperation can be achieved by an ongoing group? How does group cooperation vary with the group’s size and structure? For an arbitrary distribution of discount factors, we characterize the maximal average co-operation (MAC) likelihood of this game. The MAC likelihood is the highest average level of cooperation, over all stationary subgame perfect equilibrium paths, that the group can achieve. The MAC likelihood is shown to be increasing in monotone shifts, and decreasing in mean preserving spreads, of the distribution of discount factors. The latter suggests that more heterogeneous groups are less cooperative on average. Finally, we establish weak conditions under which the MAC likelihood exhibits increasing returns to scale when discounting is heterogeneous. That is, larger groups are more cooperative, on average, than smaller ones. By contrast, when the group has a common discount factor, the MAC likelihood is invariant to group size.Repeated games, Maximal average Cooperation likelihood, Heterogeneous discount factors, Returns to scale