Reforming state enterprises in socialist economies : guidelines for leasing them to entrepreneurs

Since the state has proven to be incompetent in its management of state owned enterprises a new structure must be found that takes into account the incompetence of the state but ensures that the state's economic interests are preserved the best way possible. Two of the most difficult tasks in this process are how to exercise ownership rights to assets and simultaneously delegate decision making to the management of the firm. This paper finds that the solution of these problems is to lease state owned enterprises to entrepreneurs through contracts derived from the principal-agent literature where the state is the principal and the agent is the lessee. Since the state needs to delegate responsibility to the management of state owned enterprises, the process of reform becomes in reality a principal-agent problem. To facilitate the reform process it is necessary to establish a credit market because the lessee may have investment plans that need to be financed. So far no country has yet tried to implement lease schemes based on principal-agent contracts. Future work needs to build a bridge between theory and reality to see whether they both can benefit from the interaction.Health Economics&Finance,International Terrorism&Counterterrorism,Economic Theory&Research,Banks&Banking Reform,Environmental Economics&Policies

A framework for the design and analysis of incentive systems for food safety control in supply chains

Since 2005 the EU food industry has primary legal responsibility for food safety control. This requires new responsibilities and relationships between government and industry, and between companies. This research presents a framework for incentive systems for food safety control in supply chains. It emphasizes key elements of food safety control from multiple perspectives and provides insights for the design and analysis of incentive systems for food safety control. An incentive system combines inter-company incentive mechanisms with intra-company decision making processes to control a hazard within the legal environment. Incentive mechanisms, which consist of a performance measure and a performance reward, induce companies to use control measures. The framework can be used to analyze the effectiveness and efficiency of alternative incentive systems in which companies have to cooperate with partners from other stages of the supply chain.Incentive mechanism, food safety, supply chain control., Agricultural and Food Policy,

Contracts, Fairness, and Incentives

We show experimentally that fairness concerns may have a decisive impact on both the actual and the optimal choice of contracts in a moral hazard context. Explicit incentive contracts that are optimal according to self-interest theory become inferior when some agents value fairness. Conversely, implicit bonus contracts that are doomed to fail among purely selfish actors provide powerful incentives and become superior when there are some fair-minded players. The principals understand this and predominantly choose the bonus contracts, even preferring a pure bonus contract over a contract that combines the enforcement power of explicit and implicit incentives. This contract preference is associated with the fact that explicit incentives weaken the enforcement power of implicit bonus incentives significantly. Our results are largely consistent with recently developed theories of fairness, which also offer interesting new insights into the interaction of contract choices, fairness and incentives.Moral Hazard; Incentives; Bonus Contract; Fairness; Inequity Aversion

Dynamic Incentive Contracts under Parameter Uncertainty

We analyze a long-term contracting problem involving common uncertainty about a parameter capturing the productivity of the relationship, and featuring a hidden action for the agent. We develop an approach that works for any utility function when the parameter and noise are normally distributed and when the effort and noise affect output additively. We then analytically solve for the optimal contract when the agent has exponential utility. We find that the Pareto frontier shifts out as information about the agent's quality improves. In the standard spot-market setup, by contrast, when the parameter measures the agent's "quality", the Pareto frontier shifts inwards with better information. Commitment is therefore more valuable when quality is known more precisely. Incentives then are easier to provide because the agent has less room to manipulate the beliefs of the principal. Moreover, in contrast to results under one-period commitment, wage volatility declines as experience accumulates.principal-agent model, optimal contract, learning, private information, reputation, career

Contracts, Fairness, and Incentives

We show experimentally that fairness concerns may have a decisive impact on both the actual and the optimal choice of contracts in a moral hazard context. Explicit incentive contracts that are optimal according to self-interest theory become inferior when some agents value fairness. Conversely, implicit bonus contracts that are doomed to fail among purely selfish actors provide powerful incentives and become superior when there are some fair-minded players. The principals understand this and predominantly choose the bonus contracts, even preferring a pure bonus contract over a contract that combines the enforcement power of explicit and implicit incentives. This contract preference is associated with the fact that explicit incentives weaken the enforcement power of implicit bonus incentives significantly. Our results are largely consistent with recently developed theories of fairness, which also offer interesting new insights into the interaction of contract choices, fairness and incentives.moral hazard, incentives, bonus contract, fairness, inequity aversion

Status and Incentives

The paper introduces status as reflecting an agent's claim to recognition in her work. It is a scarce resource: increasing an agent's status requires that another agent's status is decreased. Higher status agents are more willing to exert effort in exchange for money; better-paid agents would exert a higher effort in exchange for an improved status. Results are coherent with actual management practices: (i) egalitarianism is desirable in a static context; (ii) in a long-term work relationship, juniors' compensations are delayed; past performances are recompensed by pay increases along with an improved status within the organization's hierarchy.repeated moral hazard, internal labor markets, social status

Rural Financial Markets in Developing Countries

This review examines portions of the vast literature on rural financial markets and household behavior in the face of risk and uncertainty. We place particular emphasis on studying the important role of financial intermediaries, competition and regulation in shaping the changing structure and organization of rural markets, rather than on household strategies and bilateral contracting. Our goal is to provide a framework within which the evolution of financial intermediation in rural economies can be understood.Rural Finance, Financial Intermediation, Agricultural Credit

Rural credit in developing countries

Subsidized formal credit to the agricultural sector has been advocated as more efficient, equitable, and easier to implement than, say, land reform. But the record on subsidized credit to farmers is dismal. It shows a significant failure either to achieve an increase of agricultural output cost-effectively or to improve rural income distribution and alleviate poverty. Many of the financial institutions have proven to be inept and to lack accountability. Common features of the success stories are tougher stands on default; strict auditing and accounting procedures and financial control; and some form of joint responsibility or liability by small groups of farmers, whereby default by one member cancels future loans to the whole group.Banks&Banking Reform,Environmental Economics&Policies,Economic Theory&Research,Financial Intermediation,Insurance&Risk Mitigation