The rise of individual performance pay

xRelational contracts; Multiagent Moral Hazard; Indispensable human capital

The economic organisation of specific assets

In the international offshore industry we find that the oil companies and their main suppliers usually operate with separate ownership. But the main contractors manage a capital stock, and produce inputs, that are highly specific to the oil companies. Within the traditional theory of the firm this organizational solution emerges as a puzzle. Asset specificity is usually considered as an argument for vertical integration. The idea is that integration reduces the problem of opportunistic behaviour. In this article I show that asset specificity actually can be an argument for separate ownership. While an integrated supplier considers the asset specificity as unimportant for his strategic behaviour, disintegrated parties find that a high degree of specificity makes opportunistic behaviour less profitable than if the assets enjoyed a low degree of specificity. Asset specificity can thus function as a buffer against opportunistic behaviour. This buffer can create room for strong incentive schemes

Hidden Benefits of Reward: A Field Experiment on Motivation and Monetary Incentives

We conducted a field experiment in a controlled work environment to investigate the effect of motivational talk and its interaction with monetary incentives. We find that motivational talk significantly improves performance only when accompanied by performance pay. Moreover, performance pay slightly reduces performance unless it is accompanied by motivational talk. These effects also carry over to the quality of work. Performance pay alone leads to more mistakes. Adding motivational talk makes the difference. In treatments with performance pay, motivational talk increases output by about 20 percent and reduces the ratio of mistakes by more than 40 percent

Tournaments with price-setting agents

,Tournaments

Performance appraisal and career opportunities: A case study

,Performance; Career

Tournaments with prize-setting agents

In many tournaments it is the contestants themselves who determine reward allocation. Labor-union members bargain over wage distribution, and many firms allow self-managed teams to freely determine internal resource allocation, incentive structure, and division of labour. We analyze, and test experimentally, a rank-order tournament where heterogenous agents determine the spread between winner prize and looser prize. We investigate the relationship between prize spread, uncertainty (i.e. noise between e¤ort and performance), heterogeneity and effort. The paper challenges well-known results from tournament theory. We find that a large prize spread is associated with low degree of uncertainty and high degree of heterogeneity, and that heterogeneity triggers effort. By and large, our real-effort experiment supports the theoretical predictions.Rank-order tournament; prize spread; ability-difference

Cooperation in knowledge-intensive firms

The extent to which a knowledge-intensive firm should induce cooperation between its employees is analyzed in a model of relational contracting between a firm (principal) and its employees (two agents). The agents can cooperate by helping each other, i.e. provide effort that increases the performance of their peer without affecting their own performance. We extend the existing literature on agent-cooperation by analyzing the implications of incomplete contracts and agent hold-up. A main result is that if the agents’ hold-up power is sufficiently high, then it is suboptimal for the principal to implement cooperation, even if helping effort is productive per se. This implies, contrary to many property rights models, that social surplus may suffer if the investing parties (here the agents) are residual claimants. The model also shows that long-term relationships facilitate cooperation even if the agents cannot monitor or punish each others’ effort choices

Relational incentive contracts for teams of multitasking agents

We analyze optimal relational contracts for a group (team) of multitasking agents with hidden actions. Contracts are based on noisy signals that may be correlated across agents and between tasks. The optimal contract defines a performance measure in the form of an index (a scorecard) for each agent, and awards a bonus to the highest performing agent, provided his or her index exceeds a hurdle. An optimal index generally involves benchmarking against other agents, and this may, in combination with the hurdle requirement, introduce a cooperative element in the otherwise competitive incentive structure. For agents with separate tasks and normally distributed signals, we find that strong correlation (either positive or negative) across agents is beneficial, while larger correlation within each agent's tasks is detrimental for efficiency, and that this has implications for optimal organization of tasks. For agents with common tasks the optimal contract may have features of both tournament and team incentives. The tournament aspect incentivizes an agent to exert effort on his own task, while the hurdle necessary to receive a bonus also incentivizes an agent to help his peers. In our setting this hybrid scheme can only be optimal if signals from agents' tasks are negatively correlated. Otherwise pure team incentives are optimal

Leadership Styles and Labor-Market Conditions

Why do some leaders use praise as a means to motivate workers, whereas other leaders use social punishment? This paper develops a simple economic model to examine how leadership styles depend on the prevailing labor market conditions for workers. We show that the existence of a binding wage floor for workers (e.g., due to trade union wage bargaining, minimum wage legislation, or limited-liability protection) can make it attractive for firms to hire a leader who makes use of social punishment. Although the use of social punishments generally is socially inefficient, it lessens the need for high bonus pay, which allows the firm to extract rents from the worker. In contrast, firms hire leaders who provide praise to workers only if it is socially efficient to do so. Credible use of leadership styles requires either repeated interaction or a leader with the right social preferences. In a single-period setting, only moderately altruistic leaders use praise as a motivation tool, whereas only moderately spiteful leaders use social punishment. Lastly, we show that when the leaders’ and workers’ reservation utilities give rise to a bigger income gap between leaders and workers, attracting spiteful leaders becomes relatively less costly and unfriendly leadership becomes more prevalent

Fair advice

Millions of investors place their trust in financial advisors who may have incentives to give them bad advice. This may indicate that advisors behave more fairly than economic theory predicts. In this paper, we present results from a large-scale experiment studying advice-giving under conflicting interests. We use a binary dictator game as a baseline and transform it into a situation where the dictator gives advice that may or may not be followed. Our results show that people are averse to giving bad advice. When subjects are given the role of advisor, they behave less selfishly, even when the economic incentives and considerations remain the same as in the baseline dictator game.publishedVersio