|
on Contract Theory and Applications |
| By: | Brice Corgnet (Economic Science Institute, Argyros School of Business and Economics); Joaquin Gomez-Minambres (Bucknell University, Department of Economics,); Roberto Hernan-Gonzalez (Business School, University of Nottingham) |
| Abstract: | 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. Agents’ performance is higher in the presence of goal setting 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. The pervasive use of non-monetary incentives in the workplace may help account for previous empirical findings suggesting that firms rely on unexpectedly weak monetary incentives. |
| Keywords: | Principal-agent models, incentive theory, non-monetary incentives, goal setting, reference-dependent utility, laboratory experiments. |
| Date: | 2016–09 |
| URL: | http://d.repec.org/n?u=RePEc:not:notcdx:2016-09&r=cta |
| By: | Matteo Foschi |
| Abstract: | I study a two period model where the buyer suffers from self-control problems and his level of temptation is private information. I derive the optimal behaviour of a seller that offers her product to a buyer. In period 1, the latter decides whether or not to “enter the store” based on the prices posted by the seller. In period 2 he decides how much of the product to buy, if any. Differently from the existing literature, I assume that the seller cannot commit to the prices posted in period 1. I show how, under this framework, the presence of tempted consumers and symmetric information can explain the existence of free vouchers offered by the seller to the consumer in exchange for entering the store. In contrast with classical contract theory, I show that the relatively untempted consumer (the “low type”) can be better off when information about his type is private than when the seller is fully informed. Moreover, the presence of self-control may induce the seller to exclude the relatively strongly tempted consumer (the “high type”) from the market. |
| Keywords: | Temptation, Self-Control, Commitment, Price Discrimination, Participation Fees, Online Markets, Menus, Vouchers, Screening |
| JEL: | D42 D82 D86 L19 M31 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:16/12&r=cta |
| By: | Bell, Brian; Van Reenen, John |
| Abstract: | Would moving to relative performance contracts improve the alignment between CEO pay and performance? To address this we exploit the large rise in relative performance awards and the share of equity pay in the UK over the last two decades. Using new employer-employee matched datasets we find that the CEO pay-performance relationship remains asymmetric: pay responds more to increases in shareholders' return performance than to decreases. Further, this asymmetry is stronger when governance appears weak. Second, there is substantial 'pay-for-luck' as remuneration increases with random positive shocks, even when the CEO has equity awards that explicitly condition on firm performance relative to peer firms in the same sector. A reason why relative performance pay fails to deal with pay for luck is that CEOs who fail to meet the terms of their past performance awards are able to obtain more generous new equity rewards in the future. Moreover, this 'compensation effect' is stronger when the firm has weak corporate governance. These findings suggest that reforms to the formal structure of CEO pay contracts are unlikely to align incentives in the absence of strong shareholder governance. |
| Keywords: | CEO; equity plans; incentives; Pay |
| JEL: | G30 J31 J33 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11385&r=cta |
| By: | Luciano Fanti (Department of Economics and Management, University of Pisa, Italy); Nicola Meccheri (Department of Economics and Management, University of Pisa, Italy; The Rimini Centre for Economic Analysis, Italy) |
| Abstract: | In a managerial duopoly with unionised labour markets, this paper analyses whether owners of firms prefer to decide on incentive contracts for their managers sequentially or simultaneously. When firms compete in quantities, firms' owners can prefer choosing incentive contracts simultaneously or sequentially, depending on the unions' relative bargaining power and the degree of product differentiation. Instead, when firms compete in prices, firms' owners choose incentive contracts sequentially with substitute goods and simultaneously with complement goods. While the result under Bertrand confirms that obtained by the received literature in a framework where labour markets are competitive (non-unionised), the result under Cournot is distinctly different. |
| Keywords: | endogenous timing; managerial contracts; unionised oligopoly |
| JEL: | J33 J51 L13 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:16-19&r=cta |
| By: | Jan Zabojnik (Queen's University) |
| Abstract: | This paper studies a repeated-game model in which firms can build a reputation for rewarding innovative employees. In any Pareto efficient equilibrium, low-value innovations get developed in established firms, while high-value innovations get developed in startups. The threshold level can be discontinuous, so otherwise similar firms may exhibit very different levels of innovation. The paper also shows that the optimal incentive contract for innovative employees has an option-like form, and that a firm may want to worsen the distribution of possible innovations. The model's predictions are consistent with a broad set of observed regularities regarding the creation of employee startups. |
| Keywords: | Startups, innovation, reputation, venture capital |
| JEL: | L14 L26 O31 O34 M13 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1362&r=cta |
| By: | Thorsten Beck; Ravindra Ramrattan (Innovations for Poverty Action); Haki Pamuk (Development Economics Group, Wageningen University); Burak R. Uras (Tilburg University) |
| Abstract: | The relationship between efficient payment instruments and enforcement constraints is studied in the context of economic development. Using a novel enterprise survey from Kenya, we document a strong positive association between the use of mobile money as a method to pay suppliers and access to trade credit. We propose a dynamic general equilibrium model with heterogeneous entrepreneurs, limited financial commitment and the risk of theft to account for this empirical pattern. Mobile money dominates fiat money as a medium of exchange in its capacity to avoid theft, but it comes with electronic transaction costs. The interaction between risk of theft and limited enforcement of trade credit contracts generates demand for mobile money as a payment method with suppliers. The use of mobile money in turn reinforces valuation of trade credit contracts and relaxes enforcement constraints. Calibrating the stationary equilibrium of the model to match a set of moments in Kenyan enterprise data, the importance of the endogenous interactions between mobile money and trade credit on entrepreneurial performance and macroeconomic development is investigated. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:198&r=cta |