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Incentive Schemes (incentive + scheme)
Selected AbstractsEmployment with Alternative Incentive Schemes when Effort is Not VerifiableLABOUR, Issue 1 2005Nicola Meccheri When effort is fully observable, both contracts with bonus and tournaments, unlike efficiency wages, solve the incentive problem without generating involuntary unemployment. Only tournaments, however, allow attainment of the Pareto optimal employment level. If effort is not fully observable, previous results must, to some extent, be reconsidered. Contracts with bonus also produce involuntary unemployment, while tournaments, in addition to continuing to produce a higher level of employment, generate involuntary unemployment only if a shirker who is not caught has some probability of winning. [source] Incentive schemes for executive officers when forecasts matterMANAGERIAL AND DECISION ECONOMICS, Issue 5 2010Joaquim Vergés This paper develops a new perspective on results-based incentive schemes for non-CEO managers. It shows that it is possible to establish incentive schemes that take into account both the actual output obtained and the forecast figure previously established as a target, without the negative consequences derived from the perverse loop of hiding-ratchet effects. A general linear two-staged scheme is proposed. In addition, relevant properties of this incentive system are stated that show how principals (corporate management) may determine the expected forecasting behavior of agents (executive officers) by suitably choosing the scheme parameters according to a simple set of rules. Copyright © 2009 John Wiley & Sons, Ltd. [source] Implicit Contracts, Managerial Incentives, and Financial StructureJOURNAL OF ECONOMICS & MANAGEMENT STRATEGY, Issue 3 2001Roberta Dessí This paper examines how managers may be given incentives to exert effort, and to implement efficient implicit contracts with workers. Under certain assumptions, this can be achieved by tying managerial compensation to shareholder value. However, if reputation effects are weak, it is more efficient to adopt an incentive scheme in which the manager is punished by outside investor intervention when performance falls below a critical level, and otherwise retains control, receiving a fixed reward. The required form of outside intervention can be implemented through a financial structure combining hard debt with a dispersed ownership structure. [source] Normative decision making with multiattribute performance targetsJOURNAL OF MULTI CRITERIA DECISION ANALYSIS, Issue 3-4 2009Ali E. Abbas Abstract Many companies set multiple performance targets for their managers and reward them on meeting a threshold value for each target or goal. Examples of such incentive structures abide in the managerial literature and in organizational settings. We show that this incentive structure, while popular, has two main problems: (i) it can induce managers who try to maximize the probability of meeting their performance targets to make decisions that are not compatible with expected utility maximizing decisions, and (ii) it may lead to trade-offs among the performance objectives that are inconsistent with the corporate value function. In this paper, we propose a method to remedy these two problems, while retaining a target-based incentive scheme. We define a multiattribute target as a deterministic region in the space of multiattribute outcomes that has two properties: (1) the probability that the outcome of a multiattribute lottery lies within the target region is equal to the expected utility of the lottery, and (2) all outcomes within the target region are preferred to all outcomes outside it. These two properties lead to a new quantity; which we call the ,value aspiration equivalent' that leads managers who maximize the probability of meeting their targets to simultaneously maximize the expected utility, and it also induces trade-offs that are consistent with the decision maker's value function. Copyright © 2009 John Wiley & Sons, Ltd. [source] Delegation and strategic incentives for managers in contestsMANAGERIAL AND DECISION ECONOMICS, Issue 8 2002Matthias Kräkel Owners usually want their managers to maximize profits. As the literature on strategic delegation has shown it may be beneficial to owners to put a positive weight on sales in the optimal linear incentive scheme for managers to make them behave more aggressively in the market. This paper shows that if the competition between the managers can be characterized as a contest, owners may induce their managers to maximize sales. Moreover, there is a first-mover advantage for owners when choosing their incentive schemes. If delegation is endogenous the type of contest will determine whether all owners delegate their decisions to managers or not. Copyright © 2002 John Wiley & Sons, Ltd. [source] Federalism in an endogenous growth model with tax base sharing and heterogeneous education services,PAPERS IN REGIONAL SCIENCE, Issue 1 2005Thierry Madiès Federal system; provision of education; tax base sharing; endogenous growth and human capital; "predative" governments Abstract., We examine the effects of tax base sharing on the growth path of an economy in which central and regional governments provide heterogeneous educational services (general and specific training) which increase capital productivity. Our focus is the non co-operative game between two overlapping governments , central and regional , whose objective is to maximise their net tax revenues of educational spending (Leviathan hypothesis). We will show that the dispute between centralisation and decentralisation depends on two effects; the first is a tax effect, which supports centralisation in that tax base sharing leads to overtax the common tax base, and so has a negative effect on the growth path. Second is a public good effect, which defends decentralisation because the very diversity of central and regional educational services has a beneficial effect on the growth path (educational services are imperfect substitutes and "specific assets" of each level of government). We discuss the virtue of tax base sharing in a federation, as an incentive scheme within government's grasp. [source] Incentive Problems With Unidimensional Hidden Characteristics: A Unified ApproachECONOMETRICA, Issue 4 2010Martin F. Hellwig This paper develops a technique for studying incentive problems with unidimensional hidden characteristics in a way that is independent of whether the type set is finite, the type distribution has a continuous density, or the type distribution has both mass points and an atomless part. By this technique, the proposition that optimal incentive schemes induce no distortion "at the top" and downward distortions "below the top" is extended to arbitrary type distributions. However, mass points in the interior of the type set require pooling with adjacent higher types and, unless there are other complications, a discontinuous jump in the transition from adjacent lower types. [source] Valuing executive stock options: performance hurdles, early exercise and stochastic volatilityACCOUNTING & FINANCE, Issue 3 2008Philip Brown G13 Abstract Accounting standards require companies to assess the fair value of any stock options granted to executives and employees. We develop a model for accurately valuing executive and employee stock options, focusing on performance hurdles, early exercise and uncertain volatility. We apply the model in two case studies and show that properly computed fair values can be significantly lower than traditional Black,Scholes values. We then explore the implications for pay-for-performance sensitivity and the design of effective share-based incentive schemes. We find that performance hurdles can require a much greater fraction of total compensation to be a fixed salary, if pre-existing incentive levels are to be maintained. [source] The Diffusion of Calculative and Collaborative HRM Practices in European FirmsINDUSTRIAL RELATIONS, Issue 4 2006ERIK POUTSMA The aim of this paper is to trace and explain variations in calculative and collaborative human resource management (HRM) practices between companies and across national borders. Variations and similarities are explained in terms of the convergence and divergence of HRM practices determined by national institutions, and the increasing influence of multinational companies (MNCs). We explore the diffusion of HRM practices in Europe over time, using data sets from two surveys conducted in several European countries in 1995 and 2000. We use institutional explanations for the development of three selected bundles of HRM practices: individual, calculative performance-oriented practices; collective incentive schemes for the alignment of interests; and collaborative practices that seek to enhance the commitment of employees. We found substantial effects of country-specific institutions and of the country of origin of MNCs, which clearly support the institutional duality thesis. Foreign-owned MNCs, especially those that are US-based, appear to moderate country-specific institutional effects on the diffusion of the three HRM bundles. [source] THE CEO: A VISIBLE HAND IN WEALTH CREATION?JOURNAL OF APPLIED CORPORATE FINANCE, Issue 3 2000C. K. Prahalad Commensurate with the growth of their pay packages and public visibility, the role of the CEO in the corporate value creation process has increased significantly in recent years. This article argues that sustained wealth creation in a corporation has three distinct elements. The first and most basic is the selection of the lines of business in which to operate; this element is probably the most visible manifestation of CEO action in large corporations today. The second element is the value creation model, which answers the question: How is this particular set of businesses expected to add value over and above the sum of the values of each business or asset category standing alone? The third element is the internal governance system, which establishes the corporate structure and administrative processes of the firm and, perhaps even more important, defines the corporate values that drive the strategic and operational priorities of the different business units. The authors suggest that the essence of the work of the CEO is to develop and maintain a balanced relationship among these three elements of wealth creation and to ensure that the relationship evolves in the face of changing circumstances. CEOs are inevitably faced with dilemmas in managing this process,in particular, the need to balance continuity and change and to maintain the integrity of short-term performance disciplines while encouraging not only investment in growth opportunities (which can hurt near term performance), but also experimentation and collaboration among business units (which are difficult to measure and reward with most performance measurement and incentive schemes). Adding to the difficulties of managing such dilemmas, visibility and a strong public image are often thrust upon (if not sought by) CEOs, who must then determine how they can use that image to strengthen the commitment of their employees and investors. [source] Incentives and Standards in Agency ContractsJOURNAL OF PUBLIC ECONOMIC THEORY, Issue 2 2005ROBERT G. CHAMBERS This paper studies the structure of state-contingent contracts in the presence of moral hazard and multitasking. Necessary and sufficient conditions for the presence of multitasking to lead to fixed payments instead of incentive schemes are identified. It is shown that the primary determinant of whether multitasking leads to higher or lower powered incentives is the role that noncontractible outputs play in helping the agent deal with the production risk associated with the observable and contractible outputs. When the noncontractible outputs are risk substitutes and are socially undesirable, standards are never optimal. If the noncontractible outputs are socially desirable, standards are never optimal if the noncontractible outputs play a risk-complementary role. [source] The Economics of Shame in Work Groups: How Mutual Monitoring Can Decrease Cooperation in TeamsKYKLOS INTERNATIONAL REVIEW OF SOCIAL SCIENCES, Issue 1 2001Shepley W. Orr Recent economic theory suggests that free riding under group piece-rate incentive schemes can be alleviated by mutual monitroing and social sanctioning. This article challenges this assumption by showing that the presence of the price mechanism in mutual monitoring and sanctioning can decrease the motivation to cooperate for certain types of agents: because the social rewards for cooperation that may develop through work are potentially based in a desire for pecuniary gain, withholding approval may matter less to initially cooperative agents. Hence, mutual monitoring can decrease cooperation in teams. The author presents evidence from social psychology illuminating differences between indiividualistic and cooperative types, discusses implications for work group design and future research, and presents a short mathematical model. [source] Incentive schemes for executive officers when forecasts matterMANAGERIAL AND DECISION ECONOMICS, Issue 5 2010Joaquim Vergés This paper develops a new perspective on results-based incentive schemes for non-CEO managers. It shows that it is possible to establish incentive schemes that take into account both the actual output obtained and the forecast figure previously established as a target, without the negative consequences derived from the perverse loop of hiding-ratchet effects. A general linear two-staged scheme is proposed. In addition, relevant properties of this incentive system are stated that show how principals (corporate management) may determine the expected forecasting behavior of agents (executive officers) by suitably choosing the scheme parameters according to a simple set of rules. Copyright © 2009 John Wiley & Sons, Ltd. [source] Strategic managerial incentives under adverse selectionMANAGERIAL AND DECISION ECONOMICS, Issue 8 2005Michel Cavagnac We extend the strategic contract model where the owner designs incentive schemes for her manager before the latter takes output decisions. Firstly, we introduce private knowledge regarding costs within each owner,manager pair. Under adverse selection, we show that delegation involves a trade-off between strategic commitment and the cost of an extra informational rent linked to decentralization. Which policies will arise in equilibrium? We introduce in the game an initial stage where owners can simultaneously choose between control and delegation. We show that if decision variables are strategic substitutes, choosing output control through a quantity-lump sum transfer contract is a dominating strategy. If decision variables are strategic complements, this policy is a dominated strategy. Further, two types of dominant-strategies equilibrium may arise: in the first type, both principals use delegation; in the second one, both principals implement delegation for a low-cost manager and output control for a high-cost one. Copyright © 2005 John Wiley & Sons, Ltd. [source] Delegation and strategic incentives for managers in contestsMANAGERIAL AND DECISION ECONOMICS, Issue 8 2002Matthias Kräkel Owners usually want their managers to maximize profits. As the literature on strategic delegation has shown it may be beneficial to owners to put a positive weight on sales in the optimal linear incentive scheme for managers to make them behave more aggressively in the market. This paper shows that if the competition between the managers can be characterized as a contest, owners may induce their managers to maximize sales. Moreover, there is a first-mover advantage for owners when choosing their incentive schemes. If delegation is endogenous the type of contest will determine whether all owners delegate their decisions to managers or not. Copyright © 2002 John Wiley & Sons, Ltd. [source] Vertical externality and strategic delegationMANAGERIAL AND DECISION ECONOMICS, Issue 3 2002Eun-Soo Park This paper examines the effects of vertical externality generated by the upstream monopoly on the incentives that owners of competing downstream firms give their managers. It is shown that the introduction of the upstream monopoly may have significant effects on the incentive schemes for the downstream firms' managers. In particular, it is shown that in equilibrium, each owner obtains the simple Nash equilibrium outcome regardless of the mode of competition (quantity or price) in the downstream market. Copyright © 2002 John Wiley & Sons, Ltd. [source] RANDOM PENALTIES AND RENEWABLE RESOURCES: A MECHANISM TO REACH OPTIMAL LANDINGS IN FISHERIESNATURAL RESOURCE MODELING, Issue 3 2009FRANK JENSEN Abstract Recent literature considers illegal landings a moral hazard problem that arises because individual landings are unobservable. The literature proposes incentive schemes to solve the information problem. However, most of the proposed schemes raise huge information requirements and social budget balance is not secured. In this paper, we suggest a random penalty mechanism that reduces the information requirements and secures budget balance in the case of a given number of licensed vessels. In the random penalty mechanism, aggregate landings are measured through stock sizes and the natural growth function. If aggregate landings are below optimal landings, each fisherman receives a subsidy. If aggregate catches are above optimal landings, the mechanism works such that either the fisherman is randomly selected and pays a fine or the fisherman is not selected and receives a subsidy. The fine and subsidy can be designed such that budget balance is secured. Provided risk aversion is sufficiently large and the fine is high enough, the random penalty mechanism will generate optimal individual landings. The budget balance combined with risk aversion drives the result for this advanced tax/subsidy system that does not exhaust the resource rents. The budget balance creates interdependence between fishermen that secure optimality. [source] Contractual agreements for coordination and vendor-managed delivery under explicit transportation considerationsNAVAL RESEARCH LOGISTICS: AN INTERNATIONAL JOURNAL, Issue 5 2006egül Toptal Abstract We consider the coordination problem between a vendor and a buyer operating under generalized replenishment costs that include fixed costs as well as stepwise freight costs. We study the stochastic demand, single-period setting where the buyer must decide on the order quantity to satisfy random demand for a single item with a short product life cycle. The full order for the cycle is placed before the cycle begins and no additional orders are accepted by the vendor. Due to the nonrecurring nature of the problem, the vendor's replenishment quantity is determined by the buyer's order quantity. Consequently, by using an appropriate pricing schedule to influence the buyer's ordering behavior, there is an opportunity for the vendor to achieve substantial savings from transportation expenses, which are represented in the generalized replenishment cost function. For the problem of interest, we prove that the vendor's expected profit is not increasing in buyer's order quantity. Therefore, unlike the earlier work in the area, it is not necessarily profitable for the vendor to encourage larger order quantities. Using this nontraditional result, we demonstrate that the concept of economies of scale may or may not work by identifying the cases where the vendor can increase his/her profits either by increasing or decreasing the buyer's order quantity. We prove useful properties of the expected profit functions in the centralized and decentralized models of the problem, and we utilize these properties to develop alternative incentive schemes for win,win solutions. Our analysis allows us to quantify the value of coordination and, hence, to identify additional opportunities for the vendor to improve his/her profits by potentially turning a nonprofitable transaction into a profitable one through the use of an appropriate tariff schedule or a vendor-managed delivery contract. We demonstrate that financial gain associated with these opportunities is truly tangible under a vendor-managed delivery arrangement that potentially improves the centralized solution. Although we take the viewpoint of supply chain coordination and our goal is to provide insights about the effect of transportation considerations on the channel coordination objective and contractual agreements, the paper also contributes to the literature by analyzing and developing efficient approaches for solving the centralized problem with stepwise freight costs in the single-period setting. © 2006 Wiley Periodicals, Inc. Naval Research Logistics, 2006 [source] Kontrolliert und repräsentativ: Beispiele zur Komplementarität von Labor- und FelddatenPERSPEKTIVEN DER WIRTSCHAFTSPOLITIK, Issue 2009Armin Falk Experiments offer highly controlled environments that allow precise testing and causal inferences. Survey and field data on the other hand provide information on large and representative samples of people interacting in their natural environment. We discuss several concrete examples how to combine lab and field data and how to exploit potential complementarities. One example describes an experiment, which is run with a representative sample to guarantee control and representativeness. The second example is based on the idea to experimentally validate survey instruments to ensure behavioral validity of instruments that can be used in existing panel data sets. The third example describes the possibility to use the lab to identify causal effects, which are tested in large data sets. Topics discussed in this article comprise the relation of cognitive skills (IQ) and risk and time preferences, determinants, prevalence and economic consequences of risk attitudes, selection into incentive schemes and the impact of unfair pay on stress. [source] Suspense: Dynamic Incentives in Sports Contests,THE ECONOMIC JOURNAL, Issue 534 2009William Chan In a dynamic model of sports competition, if spectators care only about contestants' efforts, incentive schemes depending linearly on the final score difference dominate rank order schemes based only on who wins. If spectators also care about suspense, defined as valuing more contestants' efforts when the game is closer, rank order schemes can dominate linear score difference schemes, and this will be the case when the demand for suspense is sufficiently high. Under additional assumptions, we show that the optimal rank order scheme dominates a broad class of incentive schemes. [source] INCENTIVE COMPATIBLE MECHANISM DESIGN AND FIRM GROWTH: EXPERIENCES FROM TELECOMMUNICATIONS SECTOR REGULATIONANNALS OF PUBLIC AND COOPERATIVE ECONOMICS, Issue 3 2010Sumit K. Majumdar ABSTRACT**:,This article evaluates the impact of the introduction of incentive regulation on firm growth among the population of local exchange carriers in the US telecommunications industry between 1988 and 2001. The results show that the rate of return method and other intermediate incentive schemes have had a negative impact on firm growth. Conversely, the introduction of pure price caps schemes had a positive and significant impact on firms' growth. These results highlight the importance of proper and appropriate incentive compatible mechanism design in motivating firms to strive for superior performance. [source] A Note on Efficiency Wage Theory and Principal,Agent TheoryBULLETIN OF ECONOMIC RESEARCH, Issue 3 2006Uwe Jirjahn J41; J33; D82 Abstract Why are principal,agent models used in some circumstances and efficiency wage models in others? In this note, it is argued that efficiency wages provide incentives based on an evaluation of the agent's input, while the incentives analysed in principal,agent models rely on the agent's output. The choice between the two incentive schemes depends on the probability that the agent is caught shirking. Moreover, we demonstrate that a combination of input- and output-related elements provides stronger incentives than payment schemes based on merely one of these elements. However, the combination requires a more complex labour contract involving an increased cost of writing the contract. The interaction between this transaction cost and a hiring cost is analysed. [source] | ||||||||||||||||||||||||||||