nep-hrm New Economics Papers
on Human Capital and Human Resource Management
Issue of 2017‒10‒22
ten papers chosen by
Patrick Kampkötter
Eberhard Karls Universität Tübingen

  1. What Drives Reciprocal Behavior? The Optimal Provision of Incentives over the Course of Careers By Matthias Fahn; Anne Schade; Katharina Schüßler
  2. Executive Compensation: A Survey of Theory and Evidence By Alex Edmans; Xavier Gabaix; Dirk Jenter
  3. Optimal Incentive Contracts with Job Destruction Risk By Grochulski, Borys; Wong, Russell; Zhang, Yuzhe
  4. Firm-level Human Capital and Innovation: Evidence from China By Xiuli Sun; Haizheng Li; Vivek Ghosal
  5. Human Capital and Optimal Redistribution By Koeniger, Winfried; Prat, Julien
  6. Accountability one step removed By Sonntag, Axel; Zizzo, Daniel John
  7. Organized Crime and Human Capital By Mustafa Caglayan; Alessandro Flamini; Babak Jahanshahi
  8. CEO-speeches and stock returns By Bannier, Christina E.; Pauls, Thomas; Walter, Andreas
  9. Nonunion Employee Representation: Theory and the German Experience with Mandated Works Councils By Jirjahn, Uwe; Smith, Stephen C.
  10. The retention effect of training – portability, visibility, and credibility By Zwick, Thomas

  1. By: Matthias Fahn; Anne Schade; Katharina Schüßler
    Abstract: We explore how inherent preferences for reciprocity and repeated interaction interact in an optimal incentive system. Developing a theoretical model of a long-term employment relationship, we first show that reciprocal preferences are more important when an employee is close to retirement. At earlier stages, repeated interaction is more important because more future rents can be used to provide incentives. Preferences for reciprocity still affect the structure of an employment relationship early on, though, because of two reasons: first, preferences for reciprocity effectively reduce the employee’s effort costs. Second, they allow to relax the enforceability constraint that determines the principal’s commitment in the repeated interaction. Therefore, reciprocity-based and repeated-game incentives are dynamic substitutes, but complements at any given point in time. We test our main predictions using data from the German Socio-Economic Panel (SOEP) and find evidence for a stronger positive effect of positive reciprocity on effort for older workers.
    Keywords: reciprocity, relational contracts, dynamic incentives
    JEL: C73 D21 D22 D86 D90 D91
    Date: 2017
  2. By: Alex Edmans; Xavier Gabaix; Dirk Jenter
    Abstract: This paper reviews the theoretical and empirical literature on executive compensation. We start by presenting data on the level of CEO and other top executive pay over time and across firms, the changing composition of pay; and the strength of executive incentives. We compare pay in U.S. public firms to private and non-U.S. firms. We then critically analyze three non-exclusive explanations for what drives executive pay - shareholder value maximization by boards, rent extraction by executives, and institutional factors such as regulation, taxation, and accounting policy. We confront each hypothesis with the evidence. While shareholder value maximization is consistent with many practices that initially seem inefficient, no single explanation can account for all facts and historical trends; we highlight major gaps for future research. We discuss evidence on the effects of executive pay, highlighting recent identification strategies, and suggest policy implications grounded in theoretical and empirical research. Our survey has two main goals. First, we aim to tightly link the theoretical literature to the empirical evidence, and combine the insights contributed by all three views on the drivers of pay. Second, we aim to provide a user-friendly guide to executive compensation, presenting shareholder value theories using a simple unifying model, and discussing the challenges and methodological issues with empirical research.
    Keywords: executive compensation, CEO compensation, managerial incentives, pay-for-performance, corporate governance
    JEL: D31 D86 G34 M12
    Date: 2017
  3. By: Grochulski, Borys (Federal Reserve Bank of Richmond); Wong, Russell (Federal Reserve Bank of Richmond); Zhang, Yuzhe (Texas A&M University)
    Abstract: We study the implications of job destruction risk for optimal incentives in a long-term contract with moral hazard. We extend the dynamic principal-agent model of Sannikov (2008) by adding an exogenous Poisson shock that makes the match between the firm and the agent permanently unproductive. In modeling job destruction as an exogenous Poisson shock, we follow the Diamond-Mortensen-Pissarides search-and-matching literature. The optimal contract shows how job destruction risk is shared between the rm and the agent. Arrival of the job-destruction shock is always bad news for the rm but can be good news for the agent. In particular, under weak conditions, the optimal contract has exactly two regions. If the agent's continuation value is below a threshold, the agent's continuation value experiences a negative jump upon arrival of the job-destruction shock. If the agent's value is above this threshold, however, the jump in the agent's continuation value is positive, i.e., the agent gets rewarded when the match becomes unproductive. This pattern of adjustment of the agent's value at job destruction allows the firm to reduce the costs of effort incentives while the match is productive. In particular, it allows the firm to adjust the drift of the agent's continuation value process so as to decrease the risk of reaching either of the two inefficient agent retirement points. Further, we study the sensitivity of the optimal contract to the arrival rate of job destruction.
    Keywords: dynamic moral hazard; job destruction; jump risk
    JEL: D86
    Date: 2017–10–06
  4. By: Xiuli Sun; Haizheng Li; Vivek Ghosal
    Abstract: Understanding the factors that may produce a sustained rate of innovation is important for promoting economic development and growth. In this paper, we examine the role of human capital in firms’ innovation by using a large sample of manufacturing firms from China. We use two firm-level datasets from China: one from metropolitan cities, and one from provincial small and medium sized cities. Patent applications are used as the measure of innovation. Human capital indicators used include skilled human capital (number of highly educated workers), general manager’s education and tenure, and management team’s education and age. We find that skilled human capital has a significant positive effect on firms’ innovation, while the management team’s age has a significant negative effect on innovation. The General Manager’s tenure plays a significant positive role in firm innovation in metropolitan cities, while it is the General Manager’s education that has a positive and significant effect on firms’ innovation in small and middle cities. We also find that the effect of R&D on patents is insignificant for firms in large cities, but it is positive and significant in the smaller and medium sized cities. We conclude by noting some policy issues for promoting innovation in developing economies.
    Keywords: human capital, education, innovation, patents, R&D, economic development, Asia, China
    JEL: J24 I25 D21 D22 L13 O32 O33
    Date: 2017
  5. By: Koeniger, Winfried; Prat, Julien
    Abstract: We characterize optimal redistribution in a dynastic economy with observable human capital and hidden ability. We compute the optimal allocation and show how it can be implemented with student loans or means-tested grants. The numerical results reveal that human capital investment should decline in parental income because parents with high income bequeath more and this lowers the labor supply of their children through a wealth effect.
    JEL: E24 H21 I22 J24
    Date: 2017
  6. By: Sonntag, Axel; Zizzo, Daniel John
    Abstract: In a repeated real effort team production experiment workers receive a distorted signal about their co-players’ previous efforts. We vary the degree to which production can be directly traced back to a participant’s real or randomly drawn effort level. We find that individuals produce much less and the decline of contributions over time is significantly steeper under high as compared to low accountability. In an additional endogenous accountability condition observe the highest effort level.
    JEL: C91 D82 M54
    Date: 2017
  7. By: Mustafa Caglayan (Heriot-Watt University); Alessandro Flamini (Department of Economics and Management, University of Pavia); Babak Jahanshahi (Department of Economics and Management, University of Pavia)
    Abstract: Since 1980s, organized crime rooted in northern Italy with a new modality in its relation with the society: less violence and more illegal business. We study to what extent, if any, this social adaptation, dubbed silent mafia, to the highest productive area of the country, is interfering with human capital accumulation. We provide empirical evidence that in northern Italy provinces, the larger the presence of organized crime, the less human capital accumulation. This is due on the one hand to the relation between organized crime and entrepreneurs that reduces entrepreneurs' incentives to innovate, and thus leads to a fall in their demand for high-skilled labor. On the other hand to mafia's control of the territory that provides young people with examples of social elevator which reduce their incentives to acquire human capital.
    Date: 2017–10
  8. By: Bannier, Christina E.; Pauls, Thomas; Walter, Andreas
    Abstract: We analyze the market reaction to the sentiment of the CEO speech at the Annual General Meeting (AGM). Adapting a finance-specific German dictionary based on Loughran and McDonald (2011), we find that CEO speeches' textual sentiment is significantly related to abnormal stock returns and trading volume around the AGM. Investors hence seem to perceive the speeches' sentiment as a valuable indicator of future firm performance.
    JEL: G02 G12 G14
    Date: 2017
  9. By: Jirjahn, Uwe; Smith, Stephen C.
    Abstract: Theories of how nonunion employee representation impacts firm performance, affects market equilibria, and generates externalities on labor and society are synthesized. Mandated works councils in Germany provide a particularly strong form of nonunion employee representation. A systematic review of research on the German experience with mandated works councils finds generally positive effects, though these effects depend on a series of moderating factors and some impacts remain ambiguous. Finally, key questions for empirical research on nonunion employee representation, which have previously been little analyzed in the literature, are reviewed.
    Keywords: Nonunion representation,works councils,organizational failures,market failures,society
    JEL: J50 M50
    Date: 2017
  10. By: Zwick, Thomas
    Abstract: This paper analyses the effect of training participation on employees’ retention. In a comparison group approach, the probability to stay at the same employer is compared between training participants and employees who could accidentally not participate at a planned training. We control endogeneity, unobserved time-invariant effects, and extensive individual/employer characteristics. High portability of general human capital contents, visibility of training, and credibility reduce retention.
    JEL: J62 J63 M51 M53
    Date: 2017

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