Incentive Contracts

Labor relations involve incentive problems. The market solves these problems by developing a variety of institutions. This paper describes and assesses the various forms of incentive contracts.

Founding family firms, CEO incentive pay, and dual agency problems

This paper contributes to the literature on agency theory by examining relations between family involvement and CEO compensation. Using a panel of 362 small U.S. listed firms, we analyze how founding families influence firm performance through option portfolio price sensitivity. Consistent with the dual agency framework, we find that family firms have lower CEO incentive pay, which is further reduced by higher executive ownership. Interestingly, such incentive pay offsets the positive impact that families have on firm valuation. Collectively, our results show that, compared with nonfamily firms, lower incentive pay adopted by family firms due to lower agency costs mitigates the direct effect of family involvement on firm performance. Once accounting for CEO incentive pay, we do not observe performance differences between family and nonfamily firms

Computer-aided verification in mechanism design

In mechanism design, the gold standard solution concepts are dominant strategy incentive compatibility and Bayesian incentive compatibility. These solution concepts relieve the (possibly unsophisticated) bidders from the need to engage in complicated strategizing. While incentive properties are simple to state, their proofs are specific to the mechanism and can be quite complex. This raises two concerns. From a practical perspective, checking a complex proof can be a tedious process, often requiring experts knowledgeable in mechanism design. Furthermore, from a modeling perspective, if unsophisticated agents are unconvinced of incentive properties, they may strategize in unpredictable ways. To address both concerns, we explore techniques from computer-aided verification to construct formal proofs of incentive properties. Because formal proofs can be automatically checked, agents do not need to manually check the properties, or even understand the proof. To demonstrate, we present the verification of a sophisticated mechanism: the generic reduction from Bayesian incentive compatible mechanism design to algorithm design given by Hartline, Kleinberg, and Malekian. This mechanism presents new challenges for formal verification, including essential use of randomness from both the execution of the mechanism and from the prior type distributions. As an immediate consequence, our work also formalizes Bayesian incentive compatibility for the entire family of mechanisms derived via this reduction. Finally, as an intermediate step in our formalization, we provide the first formal verification of incentive compatibility for the celebrated Vickrey-Clarke-Groves mechanism

Providing health checks as incentives to retain blood donors — evidence from two field experiments

The collection of blood given by donors has proven to be a substantial societal and a managerial challenge. Consequently, blood donation services seek for incentive mechanisms to retain donors. However, economic or material rewards might entail negative side effects such as motivational crowding out or even attracting “bad blood”. In an effort to increase the retention of established blood donors, we conducted two randomized field trials (N1 = 53,257, N2 = 31,522) in cooperation with the German Red Cross Blood Donation Service and tested the effectiveness of an incentive strategy that is directly related to the blood donation itself: offering a comprehensive blood health check. Contrary to previous related research, we found substantial positive effects of a comprehensive blood health check incentive on donation behavior. In addition, unlike previous studies, we examine effects of repeated exposure to this incentive and do not find any wearout effects. Considering the positive effect of this incentive on donor retention and the relative low cost for providing this service to donors, our findings suggest that offering comprehensive blood health check incentives is a viable and cost-efficient marketing strategy to increase the retention among previous donors even if offered over the longer run.Accepted manuscrip

Equilibrium Incentive Contracts

We study a labour market in which firms can observe workers’ output but not their effort, and in which a worker’s productivity in a given firm depends on a worker-firm specific component, unobservable for the firm. Firms offer wage contracts that optimally trade off effort and wage costs. As a result, employed workers enjoy rents, which in turn create unemployment. We show that the incentive power of the equilibrium wage contract is constrained socially efficient in the absence of unemployment benefits. We then apply the model to explain the recent increase in performance-pay contracts. Within our model, this can be explained by three different factors: (i) increased importance of non-observable effort, (ii) a fall in the marginal tax rate, (iii) a reduction in the heterogeneity of workers performing the same task. The likely effect of all three factors is an increase in the equilibrium unemployment rate.Incentives; Contracts; Unemployment; efficiency

Incentive Stackelberg Mean-payoff Games

We introduce and study incentive equilibria for multi-player meanpayoff games. Incentive equilibria generalise well-studied solution concepts such as Nash equilibria and leader equilibria (also known as Stackelberg equilibria). Recall that a strategy profile is a Nash equilibrium if no player can improve his payoff by changing his strategy unilaterally. In the setting of incentive and leader equilibria, there is a distinguished player called the leader who can assign strategies to all other players, referred to as her followers. A strategy profile is a leader strategy profile if no player, except for the leader, can improve his payoff by changing his strategy unilaterally, and a leader equilibrium is a leader strategy profile with a maximal return for the leader. In the proposed case of incentive equilibria, the leader can additionally influence the behaviour of her followers by transferring parts of her payoff to her followers. The ability to incentivise her followers provides the leader with more freedom in selecting strategy profiles, and we show that this can indeed improve the payoff for the leader in such games. The key fundamental result of the paper is the existence of incentive equilibria in mean-payoff games. We further show that the decision problem related to constructing incentive equilibria is NP-complete. On a positive note, we show that, when the number of players is fixed, the complexity of the problem falls in the same class as two-player mean-payoff games. We also present an implementation of the proposed algorithms, and discuss experimental results that demonstrate the feasibility of the analysis of medium sized games.Comment: 15 pages, references, appendix, 5 figure

Privatisation, strategic foreign direct investment and the host country welfare

Recent evidence shows that developing countries and transition economies are increasingly privatising their public firms and at the same time experiencing rapid growth of inward foreign direct investment (FDI). In an international mixed oligopoly, we analyse the interaction between privatisation and FDI. We show that privatisation increases the incentive for FDI, which in turn, increases the incentive for privatisation compared to the situation of no FDI. The optimal degree of privatisation depends on the cost difference between the public and the foreign firms, and on the foreign firm's mode of entry. We show that our results are robust with respect to the incentive contracts between the owners and the managers. The incentive for FDI and is higher under the incentive contract than under the no incentive contract, and the optimal degree of privatisation is almost always higher under the incentive contract than under the no incentive contract.Privatisation; FDI; Welfare; Incentive contract