Risk Aversion and Incentive Effects

A menu of paired lottery choices is structured so that the crossover point to the high-risk lottery can be used to infer the degree of risk aversion. With "normal" laboratory payoffs of several dollars, most subjects are risk averse and few are risk loving. Scaling up all payoffs by factors of twenty, fifty, and ninety makes little difference when the high payoffs are hypothetical. In contrast, subjects become sharply more risk averse when the high payoffs are actually paid in cash. A hybrid "power/expo" utility function with increasing relative and decreasing absolute risk aversion nicely replicates the data patterns over this range of payoffs from several dollars to several hundred dollars

Do Tournaments Have Incentive Effects?

Much attention has been devoted to studying models of tournaments or situations in which an individual\u27s payment depends only on his or her output or rank relative to that of other competitors. Academic interest derives from the fact that under certain sets of assumptions, tournaments have desirable normative properties because of the incentive structures they provide. Our paper uses nonexperimental data to test whether tournaments actually elicit effort responses. We focus on professional golf tournaments because information on the incentive structure (prize distribution) and measures of individual output (players\u27 scores) are both available. We find strong support for the proposition that the level and structure of prizes in PGA tournaments influence players\u27 performance

Incentive Effects of Pensions

Many different types of pension plans exist in American firms. The stipulations of plans vary dramatically, even among large firms, with respect to vesting, relationship of the pension to final salary, maximum and minimum years of service constraints, and maximum and minimum benefit levels. These provisions are examined to determine their effects on worker behavior.Specifically, the paper analyes which plans encourage or discourage appropriate worker responses in hours worked, turnover, human capital investment and effort. An attempt is made to explain the provisions in light of the findings.

Do Tournaments Have Incentive Effects?

Much attention has been devoted to studying models of tournaments or situations in which an individual's payment depends only on his output or rank, relative to other competitors. Such models are of more than academic Interest as they may well describe the compensation structures applicable to many corporate executives and professors, to sales people whose bonuses depend on their relative outputs. and to the more obvious example of professional sports tournaments. Academic interest derives from the fact that under certain sets of assumptions tournaments have desirable normative properties because of the incentive structures they provide. Our paper uses nonexperimental data to test if tournaments actually elicit desired effort responses. We focus on golf tournaments because information on the incentive structure (prize distribution) and measures of individual output (players' scores) are both available. Under suitable assumptions, players' scores can be related to players' effort and implications for both players' overall tournament scores and their scores on the last round of a tournament drawn. In addition, data are available to control for factors other than the incentive structure that should affect output; these factors include player quality, quality of the rest of the field, difficulty of the course, and weather conditions. The data used in our analyses cane from the "1985 Golf Digest Almanac", the "Official 1985 PGA Tour Media Guide", and the "1984 PGA Tour Player Record". We find strong support for the proposition that the level and structure of prizes in PGA tournaments influence players' performance.

Incentive Effects of Social Security Under an Uncertain Disability Option

Incentive effects of pension systems are usually estimated under the assumption that the institutional environment provides a single optimal 'pathway' for retirement. However, many countries provide competing pathways which may include several early retirement options in addition to normal retirement. Moreover, early retirement options often comprise special provisions for disabled and unemployed workers that can be strategically manipulated by the employer and the employee while ultimate eligibility for such provisions is uncertain in advance. This paper shows that ignoring the endogeneity and/or uncertainty in the relevant institutional setting can severely bias the estimates of incentive effects. Ignoring the endogeneity leads to overestimated incentive effects that unduly exaggerate the 'pull' view of early retirement. In turn, when the uncertain option set is specified too generously, incentive effects are underestimated. The paper proposes several estimates to bound the true incentive effects of social security on early retirement, and applies them to the German public pension system.

Work Disability, Health, and Incentive Effects

Disability insurance – the insurance against the loss of the ability to work – is a substantial part of social security expenditures in many countries. The enrolment rates in disability insurance vary strikingly across European countries and the US. This paper investigates the extent of, and the causes for, this variation, using data from SHARE, ELSA and HRS. We show that even after controlling for differences in the demographic structure and health status these differences remain. In turn, indicators of disability insurance generosity explain 75% of the cross-national variation. We conclude that country-specific disability insurance rules are a prime candidate to explain the observed cross-country variation in disability insurance enrolment.

Work Disability, Health, and Incentive Effects

Disability insurance – the insurance against the loss of the ability to work – is a substantial part of social security expenditures in many countries. The enrolment rates in disability insurance vary strik-ingly across European countries and the US. This paper investigates the extent of, and the causes for, this variation, using data from SHARE, ELSA and HRS. We show that even after controlling for differences in the demographic structure and health status these differences remain. In turn, indicators of disability insurance generosity explain 75% of the cross-national variation. We conclude that country-specific disability insurance rules are a prime can-didate to explain the observed cross-country variation in disability insurance enrolment.

Incentive Effects of Retirement Income Transfers

The paper explores the incentive effects of retirement income transfers – essentially, non-contributory cash transfers aimed at reducing poverty among the elderly. A literature review reveals how little academic analysis of the impact of these transfers has been completed. We begin with a taxonomy of retirement income transfers, differentiating between ex-ante and ex-post interventions and universal and targeted arrangements. This distinction allows important differences across designs to be highlighted. We then provide a simple framework for thinking about what the incentive impacts of the transfers might be, distinguishing between effects related to the transfer itself and those related to the financing mechanism. Thus, from theory and available empirical evidence we derive a few policy relevant findings. First, incentive effects will depend on the level of the transfer relative to average earnings and the degree of integration between the formal and informal sectors in the economy. In general, for modest transfers, negative impacts on savings and labor supply would be contained. Second, we highlight the tradeoff between maintaining low effective marginal tax rates (EMTRs) to reduce distortions and keeping the program costs at affordable levels. This tradeoff suggests that universal programs are suboptimal. Third, in terms of design features, we emphasize the importance of implementing a gradual withdrawal of the benefit to avoid crowding-out contributory pensions among low income individuals and of indexing the eligibility age with life expectancy to contain costs. Finally we find that matching contributions can be a promising instrument to promote savings among individuals with limited savings capacity.Social pensions, Pension coverage, Retirement Insurance, matching contributions

Incentive Effects of Peer Pressure in Organizations

This paper studies the effects of peer pressure on incentives. We assume that, in addition to the material payoff, each agent's utility includes the psychological payoff from peer pressure generated by a comparison of effort costs. We show that the optimal incentive schemes depend mainly on the degree of peer pressure and of the heterogeneity of agents. Furthermore, we examine the optimal organizational forms in terms of the principal''s intention to make use of the effects of peer pressure.Heterogeneity

The incentive effects of payment by results

Recently the English NHS has introduced an activity-based payment scheme for secondary care - the Payment by Results (PbR) policy. In this paper we discuss, from an economic perspective, the main intended and unintended incentives created by this policy. We also outline the role of different NHS institutions in monitoring and analysing the impact of PbR and consider the information and data requirements for such tasks.