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Author: Björn Bartling Publisher: ISBN: Category : Languages : en Pages : 0
Book Description
While most market transactions are subject to strong incentives, transactions within firms are often not explicitly incentivized. This paper offers an explanation for this observation based on the assumption that agents are envious and suffer utility losses if others receive higher wages. We analyze the impact of envy on optimal incentive contracts in a general moral hazard model and isolate the countervailing effects of envy on the costs of providing incentives. We show that envy creates a tendency towards flat-wage contracts if agents are risk-averse and there is no limited liability. Empirical evidence suggests that social comparisons are more pronounced among employees within firms than among individuals that interact in markets. Flat-wage contracts are then more likely to be optimal in firms.
Author: Björn Bartling Publisher: ISBN: Category : Languages : en Pages : 0
Book Description
While most market transactions are subject to strong incentives, transactions within firms are often not explicitly incentivized. This paper offers an explanation for this observation based on the assumption that agents are envious and suffer utility losses if others receive higher wages. We analyze the impact of envy on optimal incentive contracts in a general moral hazard model and isolate the countervailing effects of envy on the costs of providing incentives. We show that envy creates a tendency towards flat-wage contracts if agents are risk-averse and there is no limited liability. Empirical evidence suggests that social comparisons are more pronounced among employees within firms than among individuals that interact in markets. Flat-wage contracts are then more likely to be optimal in firms.
Author: Stefan Beiner Publisher: ISBN: Category : Languages : en Pages : 53
Book Description
This paper contributes to the very small empirical literature on the effects of competition on managerial incentive schemes. Based on a theoretical model that incorporates both strategic interaction between firms and a principal agent relationship, we analyze the relationship between product market competition, incentive schemes and firm valuation. The model predicts a nonlinear relationship between the intensity of product market competition and the strength of managerial incentives. We test the implications of our model empirically based on a unique and hand-collected dataset comprising over 600 observations on 200 Swiss firms over the 2002 to 2005 period. Our results suggest that, consistent with the implications of our model, the relation between product market competition and managerial intensive schemes is convex indicating that above a certain level of intensity in product market competition, the marginal effect of competition on the strength of the incentive schemes increases in the level of competition. Moreover, competition is associated with lower firm values. These results are robust to accounting for a potential endogeneity of managerial incentives and firm value in a simultaneous equations framework.
Author: George Norman Publisher: Edward Elgar Publishing ISBN: 1783471980 Category : Business & Economics Languages : en Pages : 341
Book Description
The Dictionary balances concise explanation with comprehensive coverage, incorporating concepts such as the structure-conduct-performance paradigm, the development of the theory of the firm, the foundational contributions of game theory and models of s
Author: Tongil Kim Publisher: ISBN: Category : Languages : en Pages : 60
Book Description
Firms make optimal decisions on the level of various marketing-mix variables to maximize profits. Some of these marketing-mix variables are unobserved by researchers, yet they are important to understand when they are endogenous in that a firm has incentives to increase or decrease them depending on how they change its profit. This thesis is focused on understanding a firm's incentive in two unobservable, endogenous decisions: workforce diversity and service effort. This thesis further builds theoretical frameworks around these two concepts, validates/estimates the model using public and proprietary data, and draws implications in market competition and policy experiment. The literature in business, psychology, and sociology shows that there is a trade-off in hiring diverse workforce: diversity brings creative ideas that help solving problems, but it also creates friction among members. Under competition, the decision on the level of diversity of workforce is an important strategic decision that gives firms a competitive edge. We build a theoretical model with symmetric firms and find that the better a firm can deal with a diverse workforce or the more competition there is in the market, the more diverse workforce the firm will hire. We also find that a firm's profit decreases with the intensity of market competition as expected, but increases with the firm's inability to deal with diverse workforce as the inability deters competition between firms. Finally, we extend the model to firms with asymmetric private marginal costs and empirically validate the positive relationship between the diversity of workforce and the intensity of competition (industry concentration ratio, in particular) using two datasets from 1997: National Organizations Survey and Economics Census. Service effort, often referred to as customer service, is also another important unobservable, endogenous decision that firms must make. Empirically quantifying or measuring the service effort is difficult because it is often unobservable. This paper proposes an empirical framework of the role of service effort in demand, along with other traditional marketing mix instruments. This model allows us to measure the unobserved effort level without data on effort, which is hardly available in most empirical settings. The paper also presents an application to a unique data set obtained from a franchise operating in the car radiator market. This framework can be useful in examining various aspects of service-intensive industries. In particular, this study investigates a much-debated public policy question regarding resale price ceiling in franchising. A policy evaluation shows that resale price ceiling lowers franchisees' profits and weakens their incentive to exert effort, which reduces consumer welfare. However, I find that, overall, resale price ceiling enhance consumer welfare in the car radiator market due to the lower price generated by the price ceiling.
Author: Michael Raith Publisher: ISBN: Category : Languages : en Pages : 0
Book Description
This paper examines how the degree of competition among firms in an industry affects the optimal incentives that firms provide to their managers. A central assumption is that there is free entry and exit in the industry, which implies that changes in the nature of competition lead to changes in the equilibrium market structure. The main result is that as the intensity of product market competition increases, principals unambiguously provide stronger incentives to their agents to reduce costs, and hence agents work harder. At the same time, more intense competition also leads to a higher volatility of both firm-level profits and managers' compensation. Consequently, managers' incentives are positively correlated with firm-level risk, consistent with empirical evidence.
Author: Daron Acemoglu Publisher: ISBN: Category : Finance, Public Languages : en Pages : 45
Book Description
Most government expenditure is on goods that yield primarily private benefits, such as education, pensions, and healthcare. We argue that markets are most advantageous in areas where high-powered incentives are desirable, but in areas where high-powered incentives stimulate unproductive signalling effort, firms, or even government, may have a comparative advantage. Firms may be able to weaken incentives and improve efficiency by obscuring information about individual workers' contribution to output, and thus reducing their willingness to signal through a moral-hazard-in-teams reasoing. However, firms themselves may be unable to commit to not providing greater compensation to employees who distort their effots to improve observed performance. Government organizations, on the other hand, often have to flatter wage schedules, thereby naturally weakening the power of incentives. We suggest that there are also endogenous reasons for why governments, even when they are run by self-interested politicians, may be able to commit to lower powered incentives than firms, because government operation makes yardstick comparisons, which increase the power of incentives, more difficult
Author: Daron Acemoglu Publisher: ISBN: Category : Languages : en Pages :
Book Description
We construct a simple career concerns model where high-powered incentives can distort the composition of effort by inducing excessive signaling. We show that in the presence of this type of career concerns, markets typically fail to limit competitive pressures and cannot commit to the desirable low-powered incentives. Firms may be able to weaken incentives and improve efficiency by obscuring information about individual workers' contribution to output, and thus reducing their willingness to signal through a moral-hazard-in-teams reasoning. However, firms themselves have a commitment problem, since firm owners would like to provide high-powered incentives to their employees to increase profits. When firms cannot refrain from doing so, government provision may be useful as a credible commitment to low-powered incentives. Governments may be able to achieve this even when operated by a self-interested politician. Among other reasons, this may happen because of the government's ability to limit yardstick competition and reelection uncertainty. We discuss possible applications of our theory to pervasive government involvement in predominantly private goods such as education and management of pension funds. (JEL D23, L22, H10, H52).
Author: Nicola Lacetera Publisher: ISBN: Category : Economics Languages : en Pages : 33
Book Description
Abstract: Understanding the organization of R & D activities requires the simultaneous consideration of scientific workers' talent and tastes, companies' organizational choices, and the characteristics of the relevant industry. We develop a model of the provision of incentives to corporate scientists, in an environment where (1) scientists engage in multiple activities when performing research; (2) knowledge is not perfectly appropriable; (3) scientists are responsive to both monetary and non-monetary incentives; and (4) firms compete on the product market. We show that both the degree of knowledge spillovers and of market competition affect the incentives given to scientists, and these effects interact. First, high knowledge spillovers lead firms to soften incentives when product market competition is high, and to strengthen incentives when competition is low. Second, the relationship between the intensity of competition and the power of incentives is U-shaped, with the exact shape depending on the degree of knowledge spillovers. We also show that the performance-contingent pay for both applied and basic research increases with the non-pecuniary benefits that scientists obtain from research. We relate our findings to the existing empirical research, and also discuss their implications for management and public policy.
Author: Björn Bartling
Author: Björn Bartling
Author: Michael N. Young
Author: Stefan Beiner
Author: George Norman
Author: Tongil Kim
Author: Yoshio Yanadori
Author: Michael Raith
Author: Daron Acemoglu
Author: Daron Acemoglu
Author: Nicola Lacetera