Search results for "Incentive"
showing 10 items of 297 documents
Incentive Schemes, Private Information and the Double-Edged Role of Competition for Agents
2013
This paper examines the effect of imperfect labor market competition on the efficiency of compensation schemes in a setting with moral hazard and risk-averse agents, who have private information on their productivity. Two vertically differentiated firms compete for agents by offering contracts with fixed and variable payments. The superior firm employs both agent types in equilibrium, but the competitive pressure exerted by the inferior firm has a strong impact on contract design: For high degrees of vertical differentiation, i.e. low competition, low-ability agents are under-incentivized and exert too little effort. For high degrees of competition, high-ability agents are over-incentivized…
Entry under uncertainty: Limit and most-favored-customer pricing
2015
Abstract In the absence of uncertainty, an incumbent that attempts to prevent entry of rival firms can have no incentive to offer a most-favored-customer (MFC) clause because it could lead to higher post-entry prices. Our analysis suggests that this is not necessarily the case under uncertainty. In the presence of uncertainty, the incumbent can set a limit price that affects the entry decision. Limit pricing involves a pre-entry price different from the static monopoly price, which leads to a signaling cost. We show that part of this cost can be distributed over several periods by means of consumer refunds from the MFC clause. If the discount factor is not very high, the incumbent adopts th…
Interactive vs. non-interactive knowledge production by faculty members
2008
16 pages, 4 tables
Incentive Properties of Residual Income when There is an Option to Wait
2005
Performance measures based on residual income are increasingly popular. The academic literature shows that residual income has important incentive properties when management bases investment decisions on the net present value (NPV) rule. My analysis focuses on the case in which investment decisions can be postponed, when management must extend the simple NPV rule by considering an option value. My analysis shows that some important incentive properties of residual income still hold when there is an option to wait, but only when the residual income measure is correctly adjusted. I also provide an incentive-based explanation of why the capital charge rate within firms is often significantly h…
Goal Setting in the Principal-Agent Model: Weak Incentives for Strong Performance
2016
We study a principal-agent framework in which principals can assign wage-irrelevant goals to agents. We find evidence that, when given the possibility to set wage-irrelevant goals, principals select incentive contracts for which pay is less responsive to agents’ performance. We show that average performance of agents is higher in the presence of goal setting than in its absence despite weaker incentives. We develop a principal-agent model with reference-dependent utility that illustrates how labor contracts combining weak monetary incentives and wage-irrelevant goals can be optimal. It follows that recognizing the pervasive use of non-monetary incentives in the workplace may help account fo…
Overreporting Oil Reserves
2009
An increasing number of oil market experts argue that OPEC members substantially overstate their oil reserves. While the economic implications could be dire, the incentives for overreporting remain unclear. This paper analyzes these incentives, showing that oil exporting countries may overreport to raise expected future supply, discourage oil-substituting R&D, and hence improve their future market conditions. Overreporting, however, comes at a cost since it must be backed by observable actions and therefore induces costly distortions of supply. Surprisingly, these latter can eliminate other distortions that arise regardless of information asymmetries in presence of endogenous technological …
Are you a good employee or simply a good guy? Influence costs and contract design
2013
We develop a principal–agent model with a moral hazard problem in which the principal has access to a hard signal (the level of output) and a soft behavioral signal (the supervision signal) about the agent's level of effort. In our model, the agent can initiate influence activities and manipulate the behavioral signal. These activities are costly for the principal as they detract the agent from the productive task. We show that the agent's ability to manipulate the behavioral signal leads to low-powered incentives and increases the cost of implementing the efficient equilibrium as a result. Interestingly, the fact that manipulation activities entail productivity losses may lead to the desig…
Culture at work: how culture affects workplace behaviors
2014
Purpose – The purpose of this paper is to give structure to the argument that “culture matters.” Further, the aim is to show how cultural differences shape the use of incentives within firms and point toward culturally affected degrees of efficiency. Design/methodology/approach – The paper incorporates differences in the evaluation of the stimuli money, order, and monitoring into a simple efficiency wage model. Profit maximizing firms are assumed. Findings – It is found that the use of incentives should respect the cultural surrounding. Data from a real-world analysis can partly be explained with this model, which was not done before. Research limitations/implications – The major limitation…
Multistage Dynamics of International Environmental Agreements: Free-riding from Membership and Compliance*
2009
Abstract In dealing with the multistage dynamics of international environmental agreements (IEAs), it is necessary to analyze the dynamics of global emission level associated with the corresponding abatement process. We model multilateral collaboration among countries as a two-level coalitional game of heterogeneous players with a stepwise emission reduction over a finite and discretized period of time. The formed coalition is assumed to hold a leader's position in the game, and the players that did not join the agreement (free-riders) are assumed to accept a position of the followers. To analyze fulfillment of the emission reduction targets, we construct a time-consistent abatement scheme,…
Asymmetric Demand Information and Foreign Direct Investment
2007
We examine the FDI versus exports decision of firms competing in an oligopolistic (quantitysetting) market under demand uncertainty and asymmetric information. Compared to a firm that chooses to export, a firm that chooses to set up a plant in the host market has superior information about local market demand. In addition to the well-known tension between the fixed set-up costs of investment, the additional variable costs of exports and oligopoly sizes, the incentive to invest abroad is explained by the strategic learning effect. FDI may be observed even if trade costs are zero. The analysis is robust to price competition and to the possibility that a foreign firm can engage in both FDI and…