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Incentive Effects (incentive + effects)
Selected AbstractsThe Subjective Valuation of Indexed Stock Options and Their Incentive EffectsFINANCIAL REVIEW, Issue 2 2006A. Louis Calvet G13; G12; J33; J32 Abstract We analyze the potential role of indexed stock options in future pay-for-performance executive compensation contracts. We present a unified framework for index-linked stock options, discuss their incentive effects, argue that indexation schemes based on the capital-asset pricing model (CAPM) are the most suitable for executive compensation, and derive a subjective pricing model for the class of CAPM-based indexed stock options. Contrary to earlier work, executives would not be motivated to take on investment projects with high idiosyncratic risk once their lack of wealth diversification and degree of risk aversion are factored into the analysis. [source] Piece Rates, Fixed Wages, and Incentive Effects: Statistical Evidence from Payroll RecordsINTERNATIONAL ECONOMIC REVIEW, Issue 1 2000Harry J. Paarsch We develop and estimate an agency model of worker behavior under piece rates and fixed wages. The model implies optimal decision rules for the firm's choice of a compensation system as a function of working conditions. Our model also implies an upper and lower bound to the incentive effect (the productivity gain realized by paying workers piece rates rather than fixed wages) that can be estimated using regression methods. Using daily productivity data collected from the payroll records of a British Columbia tree-planting firm, we estimate these bounds to be an 8.8 and a 60.4 percent increase in productivity. Structural estimation, which accounts for the firm's optimal choice of a compensation system, suggests that incentives caused a 22.6 percent increase in productivity. However, only part of this increase represents valuable output because workers respond to incentives, in part, by reducing quality. [source] Incentive Effects of Expanding Federal Mass Transit Formula GrantsJOURNAL OF POLICY ANALYSIS AND MANAGEMENT, Issue 2 2001Stephen Schmidt Public subsidies to industries firms incentives to alter their behavior. When calculating the effects of such programs, previous assessments of transit subsidies have not included the effects of these incentives on the firms' output. This article reports the responses of mass transit firms to the federal transit subsidy program and changes the Transportation Equity Act for the 21st Century (TEA 21) made to that program, as predicted by a structural model of output choice. TEA 21 increases bus service in medium-sized cities by 6-8 percent, butincreases service in large cities by only 1-2 percent. The formula's incentive tier is weak, and the size of the subsidy depends little on whether that output results in increased ridership. The formula could be redesigned to provide stronger incentives to lower cost and increase ridership, thus encouraging a more efficient response from transit firms. © 2001 by the Association for Public Policy Analysis and Management. [source] Incentive Effects of Stock and Option Holdings of Target and Acquirer CEOsTHE JOURNAL OF FINANCE, Issue 4 2007JIE CAI ABSTRACT Acquisitions enable target chief executive officers (CEOs) to remove liquidity restrictions on stock and option holdings and diminish the illiquidity discount. Acquisitions also enable acquirer CEOs to improve the long-term value of overvalued holdings. Examining all firms during 1993 to 2001, we show that CEOs with higher holdings (illiquidity discount) are more likely to make acquisitions (get acquired). Further, in 250 completed acquisitions, target CEOs with a higher illiquidity discount accept a lower premium, offer less resistance, and more often leave after acquisition. Similarly, acquirer CEOs with higher holdings pay a higher premium, expedite the process, and make diversifying acquisitions using stock payment. [source] Incentive effects in the demand for health care: a bivariate panel count data estimationJOURNAL OF APPLIED ECONOMETRICS, Issue 4 2003Regina T. Riphahn This paper contributes in three dimensions to the literature on health care demand. First, it features the first application of a bivariate random effects estimator in a count data setting, to permit the efficient estimation of this type of model with panel data. Second, it provides an innovative test of adverse selection and confirms that high-risk individuals are more likely to acquire supplemental add-on insurance. Third, the estimations yield that in accordance with the theory of moral hazard, we observe a much lower frequency of doctor visits among the self-employed, and among mothers of small children. Copyright © 2002 John Wiley & Sons, Ltd. [source] Cancellation of Executive Stock Options: Tax and Accounting Income Considerations,CONTEMPORARY ACCOUNTING RESEARCH, Issue 3 2003Amin Mawani Abstract Canadian firms face a trade-off between reporting higher accounting income and paying lower taxes that arises from their ability to cancel in-the-money executive stock options and making a substitute cash payment to the executive instead of issuing shares. Firms' trade-off hypotheses are operationalized in a multilateral framework and empirically tested using insider-trading data. The multilateral approach is designed to control for the incentive effects of alternative compensation schemes and to determine the cancellation payment that keeps the executive indifferent between receiving cash or shares. The results show that firms consider both taxes and financial reporting costs in determining their option cancellation behavior. [source] PUNISHING THE POOR: A CRITIQUE OF MEANS-TESTED RETIREMENT BENEFITSECONOMIC AFFAIRS, Issue 1 2008Oskari Juurikkala Means-tested retirement benefits create strong disincentives to work and to save prior to retirement. This article outlines the structure of means-tested benefits in the UK and the USA, and reviews the theoretical and empirical evidence of their incentive effects. [source] EDUCATIONAL BENEFITS AND MILITARY SERVICE: AN ANALYSIS OF ENLISTMENT, REENLISTMENT, AND VETERANS' BENEFIT USAGE 1991,2005,ECONOMIC INQUIRY, Issue 4 2010CURTIS J. SIMON Montgomery GI Bill (MGIB) educational benefits are a prime recruiting tool in today's all-volunteer military. This paper studies the effects of changes in education benefits using data of the period 1990,2005. Higher benefits lead to higher separation due to both pure incentive effects and by attracting more college-oriented youth into military service. We deal with potential selection issues by distinguishing between anticipated and unanticipated benefit changes. Higher education benefits are associated with higher separation from the Army and Air Force, but not the other services. A $10,000 increase in MGIB benefits is estimated to increase usage by about 5 percentage points, but the duration of usage is estimated to be insensitive to benefit levels. (JEL H52, I21, J24) [source] Household Unemployment and the Labour Supply of Married WomenECONOMICA, Issue 270 2001Paul Bingley A recent reform to the UK unemployment insurance (UI) system has reduced the duration of entitlement from 12 to six months. The UI and welfare systems interact in the UK in such a way that exhaustion of UI for married individuals has potentially large disincentive effects on the labour supply of spouses. A model of labour supply is estimated for married women allowing for endogenous unemployment durations of husbands and wives. We distinguish between transfer programme induced incentive effects; correlation between labour supply and wages within couples; complementarity between the leisure times of spouses; and a discouraged worker effect. [source] The Subjective Valuation of Indexed Stock Options and Their Incentive EffectsFINANCIAL REVIEW, Issue 2 2006A. Louis Calvet G13; G12; J33; J32 Abstract We analyze the potential role of indexed stock options in future pay-for-performance executive compensation contracts. We present a unified framework for index-linked stock options, discuss their incentive effects, argue that indexation schemes based on the capital-asset pricing model (CAPM) are the most suitable for executive compensation, and derive a subjective pricing model for the class of CAPM-based indexed stock options. Contrary to earlier work, executives would not be motivated to take on investment projects with high idiosyncratic risk once their lack of wealth diversification and degree of risk aversion are factored into the analysis. [source] Risk-taking incentives of executive stock options and the asset substitution problemACCOUNTING & FINANCE, Issue 1 2005Gerald T. Garvey G32; D23; J33 Abstract Various theoretical models show that managerial compensation schemes can reduce the distortionary effects of financial leverage. There is mixed evidence as to whether highly levered firms offer less stock-based compensation, a common prediction of such models. Both the theoretical and empirical research, however, have overlooked the leverage provided by executive stock options. In principle, adjusting the exercise prices of executive stock options can mitigate the risk incentive effects of financial leverage. We show that the near-universal practice of setting option exercise prices near the prevailing stock price at the date of grant effectively undoes most of the effects of financial leverage. In a large cross-sectional sample of Canadian option-granting firms, we find evidence that executives' incentives to take equity risk are negatively rather than positively related to the leverage of their employers. [source] Performance Measure Congruity and the Balanced ScorecardJOURNAL OF ACCOUNTING RESEARCH, Issue 3 2007JÖRG BUDDE ABSTRACT This paper studies the incentive effects of a balanced scorecard within a multitask agency framework under both formal and relational contracts. First, the main characteristics of the balanced scorecard are analyzed with respect to performance measure congruity. It is shown that under complete verifiability, a properly designed balanced scorecard is capable of perfectly aligning the interests of owners and employees by means of an explicit contract. I then investigate whether subjective performance evaluation is beneficial when not all the scorecard measures are contractible. It emerges that congruity of the contractible scorecard measures constrains a purely implicit incentive contract, but the first-best solution may still be obtained through a combination of formal and relational contracts. Furthermore, a purely explicit contract in most cases can be improved by incorporating subjective rewards. [source] CEO Stock Options and Equity Risk IncentivesJOURNAL OF BUSINESS FINANCE & ACCOUNTING, Issue 1-2 2006Melissa A. Williams Abstract: We test the hypothesis that the risk incentive effects of CEO stock option grants motivate managers to take on more risk than they would otherwise. Using a sample of mergers we document that the ratio of post- to pre-merger stock return variance is positively related to the risk incentive effect of CEO stock option compensation but this relationship is conditioned on firm size, with firm size having a moderating effect on the risk incentive effect of stock options. Using a broader time-series cross-sectional sample of firms we find a strong positive relationship between CEO risk incentive embedded in the stock options and subsequent equity return volatility. As in the case of the merger sample, this relationship is stronger for smaller firms. [source] MULTIPLE-PRIZE CONTESTS , THE OPTIMAL ALLOCATION OF PRIZESJOURNAL OF ECONOMIC SURVEYS, Issue 1 2009Dana Sisak Abstract Multiple-prize contests are important in various fields of economics ranging from rent seeking over labour economics, patent and R&D races to tendering for (governmental) projects. Hence it is crucial to understand the incentive effects of multiple prizes on effort investment. This survey attempts to outline, compare and evaluate the results from the literature. While a first prize always results in a positive incentive to invest effort, second and later prizes lead to ambiguous effects. Depending on the objective function, the characteristics of the individuals and the type of contest a different prize allocation is optimal. [source] On the Popular Support for Progressive TaxationJOURNAL OF PUBLIC ECONOMIC THEORY, Issue 4 2003Esteban F. Klor The "popular support for progressive taxation theorem" (Marhuenda and Ortuño-Ortín, 1995) provides an important formalization of the intuition that a majority of relatively poor voters over rich ones leads to progressive income taxation. Yet the theorem does not provide an equilibrium outcome. In addition, it assumes an overly restrictive domain of tax schedules and no incentive effects of income taxation. This paper shows that none of these assumptions of the theorem can be relaxed completely. Most notably, it is shown that a majority of poor voters does not imply progressive taxation in a more general policy space and that a regressive tax schedule may obtain a majority over a progressive one when individuals' income is endogenous. [source] Der Markt für Venture Capital: Anreizprobleme, Governance Strukturen und staatliche InterventionenPERSPEKTIVEN DER WIRTSCHAFTSPOLITIK, Issue 3 2002Georg Gebhardt In this paper we give an overview, with special emphasis on Germany, of the recent development of the market for venture capital. We analyse the financial contracting problems that arise when entrepreneurs need capital from outside investors, and demonstrate how these problems are addressed by the institutions and contracts observed in the market for venture capital. Finally, we discuss the arguments in favour of government subsidies for private R&D, and argue that there are positive incentive effects if these subsidies are given to venture capital financed projects, rather than to established firms. [source] Some Economics of Safe Injecting RoomsTHE AUSTRALIAN ECONOMIC REVIEW, Issue 1 2001Harry Clarke Provision of safe injecting rooms (SIRs), needle exchanges and other harm minimisation schemes reduce mortality and other health risks that illicit drug users experience. However, SIRs diminish incentives to refrain from the use of drugs by reducing the risk of a key harmful consequence of use, namely the user's death. Moreover, such harm minimisation efforts are socially costly. Economic approaches to drug management balance benefits from harm minimisation against policy costs and the costs associated with a failure of community drug abstinence. This article shows that the economic case for SIRs disappears with conservative assumptions about adverse incentive effects of reduced mortality risks even when only modest weight is placed on drug abstinence objectives. [source] A Model Under Siege: A Case Study of the German Retirement Insurance SystemTHE ECONOMIC JOURNAL, Issue 461 2000Axel Borsch-Supan This study evaluates the positive and negative features of the German public pension system and discusses three reasons for its increasing perceived and real difficulties: maturation, negative incentive effects, and the problems of demographic change. The German system in its current form may be able to limp through the coming decades but will cease to be the exemplary Bismarckian machine that has created generous retirement incomes at reasonable tax rates. Current policy proposals are insufficient and a few but incisive design changes and some degree of prefunding could rescue the many positive aspects of the German retirement insurance system. [source] Auctions on the Internet: What's Being Auctioned, and How?THE JOURNAL OF INDUSTRIAL ECONOMICS, Issue 3 2000David Lucking-Reiley This paper is an economist's guide to auctions on the Internet. It traces the development of online auctions since 1993, and presents data from a comprehensive study of 142 different Internet auction sites. The results describe the transaction volumes, the types of auction mechanisms used, the types of goods auctioned, and the business models employed at the various sites. These new electronic-commerce institutions raise interesting questions for the economic theory of auctions, such as predicting the types of goods to be sold at auction, examining the incentive effects of varying auctioneer fee structures, and identifying the optimal auction formats for online sellers. [source] THE OPTIMAL DIVISION OF GOVERNMENT EXPENDITURE BETWEEN PUBLIC GOODS AND TRANSFER PAYMENTSAUSTRALIAN ECONOMIC PAPERS, Issue 2 2010JOHN CREEDY This paper examines the optimal ratio of transfer payments to expenditure on public goods, for a given income tax rate. The transfer payment is then determined by the government's budget constraint. The optimal ratio of transfers to public good expenditure per person is expressed as a function of the ratio of the median to the arithmetic mean wage, and of the tax rate. Reductions in the skewness of the wage rate distribution are associated with reductions in transfer payments relative to public goods expenditure, at a decreasing rate. Furthermore, increases in the tax rate, from relatively low levels, are associated with increases in the relative importance of transfer payments. But beyond a certain level, further tax rate increases are associated with a lower ratio of transfers to public goods, because of adverse incentive effects. [source] Corporate assets as a trust: for whom are corporate officers trustees in insolvency? the role of incentives in maintaining the trust,INTERNATIONAL INSOLVENCY REVIEW, Issue 2 2003Ronald B. Davis Uncertainty is a constant theme when corporations are in financial distress. Yet any successful restructuring of an insolvent corporation requires numerous stakeholders, including creditors, employees and suppliers, repose some degree of trust in those corporate officers who are trying to continue to operate the firm while restructuring it into a viable entity. This article looks at the issue of the positive and negative incentives that can be generated for corporate officers and directors from both their continuing control of corporate assets and their potential personal liability arising from corporate activity both before and after the corporation became insolvent. The potential role these incentives can play in providing a basis for the trust needed to meet the other governance challenges that arise in a restructuring is reviewed in the context of recent developments in Canada concerning the duties of corporate directors to creditors during insolvency. Also reviewed is the role of directors' insurance and indemnification in altering the incentives' effects on directors' behavior. Finally a critical appraisal is given of the present legal regime's provision for compromise of claims against corporate officers during restructuring, as well as the proposal to amend the law to allow complete exoneration of corporate directors from certain liabilities on insolvency. The article urges caution in altering the effects of incentives that may create the necessary basis for trust in the distressed corporation's officers amongst those stakeholders whose co-operation is crucial to restructuring. Copyright © 2003 John Wiley & Sons, Ltd. [source] | ||||||||||||||||||||||||||||