Pass/Fail, A-F, or 0-100? Optimal Grading of Eager Students

This paper analyzes optimal grading in a world that focuses on top grades. Students choose an effort level, their performance is graded, and their grade correlates with their future income. Ex-ante, the policy maker chooses the optimal coarseness of the grading scale to maximize student welfare. When choosing their effort, students overweight outstanding - or salient - grades. I show that this behavior leads to excessive effort levels when grading is fully informative, and that coarse grading can be used to counterbalance incentives. Thus, salience can help explain why grading ranges from Pass/Fail scales (tenure decisions) via A-F-scales (school) to fully disclosing scores (e.g. SAT)

Managerial accountability for payroll expense and firm-size wage effects

We argue that job performance appraisal is an agency problem between a manager and his employees featuring asymmetric transfer values: Ratings given by the manager are money equivalent for the employees but only partially so for the manager. The asymmetry assumption is based on evidence that managers are not held fully accountable for payroll expense incurred, which, we argue, stems from the misalignment of managerial compensation with the profits of the firm. Other evidence also shows that the problem of managerial unaccountability is more aggravated in larger firms. In this paper, we develop a nested agency model of economic organization of a firm with unaccountable managers, which in equilibrium obtains the firm-size wage effects the large-firm wage premium and inverse relationship between firm size and wage dispersion. We also relate and explain the compression of ratings phenomenon from literature on organizational psychology

The provision point mechanism with reward money

We modify the provision point mechanism by introducing reward money, which is distributed among the contributors in proportion to their contributions only when the provision point is not reached. In equilibrium, the provision point is always reached as competition for reward money and preference for the public good induce sufficient contributions. In environments without aggregate uncertainty, the mechanism not only ensures allocative efficiency but also distributional. At a specific level of reward money, there is a unique equilibrium, where all consumers contribute the same proportion of their private valuations. The advantages of the mechanism are also demonstrated for collective action problems