Social Exchange and Common Agency in Organizations

We study the relation between formal incentives and social exchange in organizations where employees work for several managers and reciprocate to a manager's attention with higher effort. To this end we develop a common agency model with two-sided moral hazard. We show that when effort is contractible and attention is not, the first-best can be achieved through bonus pay for both managers and employees. When neither effort nor attention are contractible, an 'attention race' arises, as each manager tries to sway the employee's effort his way. While this may result in too much social exchange, the attention race may also be a blessing because it alleviates managers' moral-hazard problem in attention provision. Lastly, we derive the implications of these contract imperfections for optimal organizational design

Why does Centralisation fail to internalise Policy Externalities?

Centralisation of political decision making often fails to produce the desired results. For instance, it is frequently argued that decision making within the European Union results in overspending and overregulation in some policy areas, while too low spending and too little regulation prevails in other policy areas. In this paper, we study a model in which delegates from jurisdictions bargain over the amounts of public goods provided by jurisdictions. Following Besley and Coate (2000) we show that local policy makers have an incentive to delegate bargaining to 'public good lovers' if all the cost of public goods are shared through a common budget. Consequently, overprovision of public goods results. If a sufficiently large part of the cost of public goods can not be shared among regions, underprovision of public goods persists under centralised decision making because local policy makers delegate bargaining to 'conservatives'. Underprovision is strongest when spillover effects are moderate: both in the absence of spillover effects and in the case of global public goods, centralised decision making produces the social optimum. Finally, we study financing rules that may help to avoid strategic delegation by local policy makers

Reciprocity and Incentive Pay in the Workplace

We study optimal incentive contracts for workers who are reciprocal to management attention. When neither worker's effort nor manager's attention can be contracted, a double moral-hazard problem arises, implying that reciprocal workers should be given weak financial incentives. In a multiple-agent setting, this problem can be resolved using promotion incentives. We test these predictions using German Socio-Economic Panel data. We find that workers who are more reciprocal are significantly more likely to receive promotion incentives, while there is no such relation for individual bonus pay