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on Contract Theory and Applications |
| By: | Claudia M. Landeo (University of Alberta); Kathryn E. Spier (Harvard Law School and NBER) |
| Abstract: | This paper reports the results of an experiment on incentive contracts for teams. The agents, whose efforts are complementary, are rewarded according to a sharing rule chosen by the principal. Depending on the sharing rule, the agents confront endogenous prisoner's dilemma or stag-hunt environments. Our main findings are as follows. First, we demonstrate that ongoing interaction among team members positively affects the principal's payoff. Greater team cooperation is successfully induced with less generous sharing rules in infinitely-repeated environments. Second, we provide evidence of the positive effects of communication on team cooperation in the absence of ongoing team interaction. Fostering communication among team members does not significantly affect the principal's payoff, suggesting that agents' communication is an imperfect substitute for ongoing team interaction. Third, we show that offering low sharing rules can backfire. The agents are willing to engage in costly punishment (shirking) as retaliation for low offers from the principal. Our findings suggest that offering low sharing rules is perceived by the agents as unkind behavior and hence, triggers negative reciprocity. |
| Keywords: | Moral Hazard in Teams, Prisoner's Dilemma, Stag-Hunt Games, Infinitely-Repeated Games, Communication, Reciprocity, Laboratory Experiments |
| JEL: | C72 C90 D86 K10 L23 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:apc:wpaper:2015-052&r=all |
| By: | Thanassoulis, John (Bank of England); Tanaka, Misa (Bank of England) |
| Abstract: | This paper studies the agency problem between bank management, shareholders, and the taxpayer. Executive bonuses increase in the probability the bank is too big to fail. Bank management recognise it is very likely optimal to select risky projects which exploit the taxpayer, implying project selection effort (eg due diligence) is more expensive to incentivise. This agency problem leads to too much risk for society, not for shareholders. Compensation rules aimed at solving management-shareholder agency problems — equity pay, deferred, including debt — do not correct the excessive risk taking. By contrast, malus and clawbacks can incentivise the bank management to make better risk choices. |
| Keywords: | Executive compensation; bankers bonuses; risk-taking; financial regulation; return on equity; clawback; deferral |
| JEL: | G21 G28 G32 G38 |
| Date: | 2015–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0558&r=all |
| By: | Smirnov, Vladimir; Wait, Andrew |
| Abstract: | Incentive reversal (IR) is when higher rewards induce some agents to reduce their effort (Winter, 2009). We show that IR can hold for all agents when: there is an improvement in production technology; and rewards are based on team output. Whilst IR requires at least one worker's marginal return to be decreasing in team productivity when agents invest simultaneously, this is not necessary with sequential investments. Rather, IR can occur with sequential investment when the marginal return of effort for all agents is increasing with improvements in technology. |
| Keywords: | Moral hazard in teams; Technology; Productivity; Incentive reversal |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:syd:wpaper:2015-21&r=all |
| By: | Renaud Bourlès (AMSE - Aix-Marseille School of Economics - EHESS - École des hautes études en sciences sociales - Centre national de la recherche scientifique (CNRS) - Ecole Centrale Marseille (ECM) - AMU - Aix-Marseille Université) |
| Abstract: | Long-term insurance contracts are widespread, particularly in public health and the labor market. Such contracts typically involve monthly or annual premia which are related to the insured’s risk profile, where a given profile might change based on observed outcomes which depend on the insured’s prevention efforts. The aim of this paper is to analyze the latter relationship. In a two-period optimal insurance contract in which the insured’s risk profile is partly governed by the effort he puts on prevention, we find that both the insured’s risk aversion and prudence play a crucial role. If absolute prudence is greater than twice absolute risk aversion, moral hazard justifies setting a higher premium in the first period but also greater premium discrimination in the second period. For specific utility functions, moreover, an increase in the gap between prudence and risk aversion increases the initial premium and the subsequent premium discrimination. These results provide insights on the tradeoffs between long-term insurance and the incentives for primary prevention arising from risk classification, as well as between inter- and intra-generational insurance. |
| Keywords: | long-term insurance, classification risk, moral hazard, prudence |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01214592&r=all |
| By: | Julien Champagne |
| Abstract: | This paper considers a real business cycle model with labor search frictions where two types of incentive pay are explicitly introduced following the insights from the micro literature on performance pay (e.g. Lazear, 1986). While in both schemes workers and firms negotiate ahead of time-t information, the object of the negotiation is different. The first scheme is called an “efficiency wage,” since it follows closely the intuition of the shirking model by Shapiro and Stiglitz (1984), while the second is called a “performancepay” wage, since the negotiation occurs over a wage schedule that links the worker’s wage to the worker’s output. The key feature here is that the worker can then adjust the level of effort (i.e. performance) provided in any period. I simulate a shift toward performance-pay contracts as experienced by the U.S. labor market to assess whether it can account simultaneously for two documented business cycle phenomena: the increase in relative wage volatility and the Great Moderation. While the model yields higher wage volatility when performance pay is more pervasive in the economy, it produces higher volatility of output and higher procyclicality of wages, two results counterfactual to what the U.S. economy has experienced during the Great Moderation. These results pose a challenge to the idea that higher wage flexibility through an increase in performance-pay schemes can account for business cycle statistics observed over the past 30 years. |
| Keywords: | Business fluctuations and cycles; Labour markets |
| JEL: | E24 J33 J41 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:15-35&r=all |
| By: | Or Shachar (Federal Reserve Bank of New York); Jennifer La'O (Columbia University); Anna Costello (Massachusetts Institute of Technology); Nina Boyarchenko (Federal Reserve Bank of New York) |
| Abstract: | We study how bank holding companies interact in the corporate bond, syndicated loan, and credit default swap (CDS) markets. These three markets represent different ways to trade credit risk. The corporate bond market allows market participants to trade corporate credit risk directly. Similarly, the syndicated loan market allows direct exposure to corporate credit risk but is limited to only the largest borrowers and has lower secondary market liquidity. Finally, participants in the CDS market take an indirect exposure to the ultimate borrower. CDS markets are the most liquid of the three markets, allowing dealers to more easily assume long and short positions. Moreover, by entering into a CDS contract with another dealer, the firm also exposes itself to counterparty risk. This paper links data from these three different markets to create a more complete picture of how dealers assume and distribute credit risk. We identify key determinants of dealers' net and gross exposures to credit risk. We furthermore map out the interdealer network structures in these markets, allowing us to study how these network structures distribute risk among the dealers and how they shape the total risk borne by the system. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1048&r=all |