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The Intensity Of Incentives In Firms And Markets
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Book Synopsis The Intensity of Incentives in Firms and Markets by : Björn Bartling
Download or read book The Intensity of Incentives in Firms and Markets written by Björn Bartling and published by . This book was released on 2011 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: While most market transactions are subject to strong incentives, transactions within firms are often not explicitly incentivized. This paper offers an explanation for this observation based on the assumption that agents are envious and suffer utility losses if others receive higher wages. We analyze the impact of envy on optimal incentive contracts in a general moral hazard model and isolate the countervailing effects of envy on the costs of providing incentives. We show that envy creates a tendency towards flat-wage contracts if agents are risk-averse and there is no limited liability. Empirical evidence suggests that social comparisons are more pronounced among employees within firms than among individuals that interact in markets. Flat-wage contracts are then more likely to be optimal in firms.
Book Synopsis The Impact of Capital Markets on Compensation Incentives, Organizational Slack, and Firm Innovation by : Michael N. Young
Download or read book The Impact of Capital Markets on Compensation Incentives, Organizational Slack, and Firm Innovation written by Michael N. Young and published by . This book was released on 1999 with total page 226 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Product Market Competition, Managerial Incentives, and Firm Valuation by : Stefan Beiner
Download or read book Product Market Competition, Managerial Incentives, and Firm Valuation written by Stefan Beiner and published by . This book was released on 2013 with total page 53 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper contributes to the very small empirical literature on the effects of competition on managerial incentive schemes. Based on a theoretical model that incorporates both strategic interaction between firms and a principal agent relationship, we analyze the relationship between product market competition, incentive schemes and firm valuation. The model predicts a nonlinear relationship between the intensity of product market competition and the strength of managerial incentives. We test the implications of our model empirically based on a unique and hand-collected dataset comprising over 600 observations on 200 Swiss firms over the 2002 to 2005 period. Our results suggest that, consistent with the implications of our model, the relation between product market competition and managerial intensive schemes is convex indicating that above a certain level of intensity in product market competition, the marginal effect of competition on the strength of the incentive schemes increases in the level of competition. Moreover, competition is associated with lower firm values. These results are robust to accounting for a potential endogeneity of managerial incentives and firm value in a simultaneous equations framework.
Book Synopsis Incentives in Firm's Unobservable, Endogenous Decisions by : Tongil Kim
Download or read book Incentives in Firm's Unobservable, Endogenous Decisions written by Tongil Kim and published by . This book was released on 2013 with total page 60 pages. Available in PDF, EPUB and Kindle. Book excerpt: Firms make optimal decisions on the level of various marketing-mix variables to maximize profits. Some of these marketing-mix variables are unobserved by researchers, yet they are important to understand when they are endogenous in that a firm has incentives to increase or decrease them depending on how they change its profit. This thesis is focused on understanding a firm's incentive in two unobservable, endogenous decisions: workforce diversity and service effort. This thesis further builds theoretical frameworks around these two concepts, validates/estimates the model using public and proprietary data, and draws implications in market competition and policy experiment. The literature in business, psychology, and sociology shows that there is a trade-off in hiring diverse workforce: diversity brings creative ideas that help solving problems, but it also creates friction among members. Under competition, the decision on the level of diversity of workforce is an important strategic decision that gives firms a competitive edge. We build a theoretical model with symmetric firms and find that the better a firm can deal with a diverse workforce or the more competition there is in the market, the more diverse workforce the firm will hire. We also find that a firm's profit decreases with the intensity of market competition as expected, but increases with the firm's inability to deal with diverse workforce as the inability deters competition between firms. Finally, we extend the model to firms with asymmetric private marginal costs and empirically validate the positive relationship between the diversity of workforce and the intensity of competition (industry concentration ratio, in particular) using two datasets from 1997: National Organizations Survey and Economics Census. Service effort, often referred to as customer service, is also another important unobservable, endogenous decision that firms must make. Empirically quantifying or measuring the service effort is difficult because it is often unobservable. This paper proposes an empirical framework of the role of service effort in demand, along with other traditional marketing mix instruments. This model allows us to measure the unobserved effort level without data on effort, which is hardly available in most empirical settings. The paper also presents an application to a unique data set obtained from a franchise operating in the car radiator market. This framework can be useful in examining various aspects of service-intensive industries. In particular, this study investigates a much-debated public policy question regarding resale price ceiling in franchising. A policy evaluation shows that resale price ceiling lowers franchisees' profits and weakens their incentive to exert effort, which reduces consumer welfare. However, I find that, overall, resale price ceiling enhance consumer welfare in the car radiator market due to the lower price generated by the price ceiling.
Book Synopsis Dictionary of Industrial Organization by : George Norman
Download or read book Dictionary of Industrial Organization written by George Norman and published by Edward Elgar Publishing. This book was released on 2014-03-28 with total page 341 pages. Available in PDF, EPUB and Kindle. Book excerpt: The Dictionary balances concise explanation with comprehensive coverage, incorporating concepts such as the structure-conduct-performance paradigm, the development of the theory of the firm, the foundational contributions of game theory and models of s
Book Synopsis A Recipe for Success? by : Yoshio Yanadori
Download or read book A Recipe for Success? written by Yoshio Yanadori and published by . This book was released on 2005 with total page 252 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Competition, Risk and Managerial Incentives by : Michael Raith
Download or read book Competition, Risk and Managerial Incentives written by Michael Raith and published by . This book was released on 2001 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines how the degree of competition among firms in an industry affects the optimal incentives that firms provide to their managers. A central assumption is that there is free entry and exit in the industry, which implies that changes in the nature of competition lead to changes in the equilibrium market structure. The main result is that as the intensity of product market competition increases, principals unambiguously provide stronger incentives to their agents to reduce costs, and hence agents work harder. At the same time, more intense competition also leads to a higher volatility of both firm-level profits and managers' compensation. Consequently, managers' incentives are positively correlated with firm-level risk, consistent with empirical evidence.
Book Synopsis Incentives in Markets, Firms and Governments by : Daron Acemoglu
Download or read book Incentives in Markets, Firms and Governments written by Daron Acemoglu and published by . This book was released on 2003 with total page 45 pages. Available in PDF, EPUB and Kindle. Book excerpt: Most government expenditure is on goods that yield primarily private benefits, such as education, pensions, and healthcare. We argue that markets are most advantageous in areas where high-powered incentives are desirable, but in areas where high-powered incentives stimulate unproductive signalling effort, firms, or even government, may have a comparative advantage. Firms may be able to weaken incentives and improve efficiency by obscuring information about individual workers' contribution to output, and thus reducing their willingness to signal through a moral-hazard-in-teams reasoing. However, firms themselves may be unable to commit to not providing greater compensation to employees who distort their effots to improve observed performance. Government organizations, on the other hand, often have to flatter wage schedules, thereby naturally weakening the power of incentives. We suggest that there are also endogenous reasons for why governments, even when they are run by self-interested politicians, may be able to commit to lower powered incentives than firms, because government operation makes yardstick comparisons, which increase the power of incentives, more difficult
Book Synopsis Incentives in Markets, Firms, and Governments by : Daron Acemoglu
Download or read book Incentives in Markets, Firms, and Governments written by Daron Acemoglu and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We construct a simple career concerns model where high-powered incentives can distort the composition of effort by inducing excessive signaling. We show that in the presence of this type of career concerns, markets typically fail to limit competitive pressures and cannot commit to the desirable low-powered incentives. Firms may be able to weaken incentives and improve efficiency by obscuring information about individual workers' contribution to output, and thus reducing their willingness to signal through a moral-hazard-in-teams reasoning. However, firms themselves have a commitment problem, since firm owners would like to provide high-powered incentives to their employees to increase profits. When firms cannot refrain from doing so, government provision may be useful as a credible commitment to low-powered incentives. Governments may be able to achieve this even when operated by a self-interested politician. Among other reasons, this may happen because of the government's ability to limit yardstick competition and reelection uncertainty. We discuss possible applications of our theory to pervasive government involvement in predominantly private goods such as education and management of pension funds. (JEL D23, L22, H10, H52).
Book Synopsis Individual Preferences, Organization, and Competition in a Model of R & D Incentive Provision by : Nicola Lacetera
Download or read book Individual Preferences, Organization, and Competition in a Model of R & D Incentive Provision written by Nicola Lacetera and published by . This book was released on 2011 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: Abstract: Understanding the organization of R & D activities requires the simultaneous consideration of scientific workers' talent and tastes, companies' organizational choices, and the characteristics of the relevant industry. We develop a model of the provision of incentives to corporate scientists, in an environment where (1) scientists engage in multiple activities when performing research; (2) knowledge is not perfectly appropriable; (3) scientists are responsive to both monetary and non-monetary incentives; and (4) firms compete on the product market. We show that both the degree of knowledge spillovers and of market competition affect the incentives given to scientists, and these effects interact. First, high knowledge spillovers lead firms to soften incentives when product market competition is high, and to strengthen incentives when competition is low. Second, the relationship between the intensity of competition and the power of incentives is U-shaped, with the exact shape depending on the degree of knowledge spillovers. We also show that the performance-contingent pay for both applied and basic research increases with the non-pecuniary benefits that scientists obtain from research. We relate our findings to the existing empirical research, and also discuss their implications for management and public policy.
Book Synopsis Psychological Motivations and Biases in Economic Behavior and Their Effects on Markets and Firm Strategy by : Ofer H. Azar
Download or read book Psychological Motivations and Biases in Economic Behavior and Their Effects on Markets and Firm Strategy written by Ofer H. Azar and published by . This book was released on 2004 with total page 146 pages. Available in PDF, EPUB and Kindle. Book excerpt: Chapter 4 examines the optimal choice of monitoring intensity when workers face external incentives (incentives that are not provided by the firm), such as tips, satisfaction from working well, or the desire to build reputation in order to be more attractive to other employers. Increase in such external incentives reduces optimal monitoring intensity but nevertheless increases effort and profits unambiguously. The model explains why US firms supported the establishment of tipping in the late 19th century but raises the possibility that European firms make costly mistakes by replacing tips with service charges.
Book Synopsis Essays on the Economics of Organizations, Productivity and Labor by : Bradford Lee Cowgill
Download or read book Essays on the Economics of Organizations, Productivity and Labor written by Bradford Lee Cowgill and published by . This book was released on 2015 with total page 163 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation is about how firms use incentives and information in internal personnel and management practices, in particular relating to hiring and innovation. In the first chapter, I study competition between workers inside of firms. Why do firms use incentives that encourage anti-social behavior among employees? Rank-based promotion schemes are among the most widespread forms competition and incentives, despite encouraging influence-peddling, sabotage and anti-social behavior. I study a natural experiment using rich administrative data from a large, white collar firm. At the firm, competitors for promotions depend partly on dates-of-hire. I utilize the date-of-hire assignment as a source of exogenous variation in the intensity of intra-worker competition. I use the firm's multidimensional timestamped productivity logs as ``time diaries'' to study the amount, character and allocation of output across tasks. I find that competition has significant incentives for effort and efficiency -- as well as lobbying- and sabotage- like behaviors -- without affecting the quality and innovativeness of output. I also find that employees facing high competition are more likely to quit and join other companies, particularly higher-performing employees. Lastly, I show that competition induces workers to differentiate and specialize by concentrating effort into a smaller set of tasks. These results show that while workers respond to incentives from competition, they also seek to avoid it through sorting and differentiation strategies. The productivity gains from differentiation and specialization may partly explain the common use of these incentives by firms. In the second chapter, I study how firms use social networks in hiring. Using personnel data from nine large firms in three industries (call-centers, trucking, and high-tech), we empirically assess the benefit to firms of hiring through employee referrals. Compared to non-referred applicants, referred applicants are more likely to be hired and more likely to accept offers, even though referrals and non-referrals have similar skill characteristics. Referred workers tend to have similar productivity compared to non-referred workers on most measures, but referred workers have lower accident rates in trucking and produce more patents in high-tech. Referred workers are substantially less likely to quit and earn slightly higher wages than non-referred workers. In call-centers and trucking, the two industries for which we can calculate worker-level profits, referred workers yield substantially higher profits per worker than non-referred workers. These profit differences are driven by lower turnover and lower recruiting costs for referrals. In the third and final chapter, I study the use of betting markets inside of firms. Despite the popularity of prediction markets among economists, businesses and policymakers have been slow to adopt them in decision making. Most studies of prediction markets outside the lab are from public markets with large trading populations. Corporate prediction markets face additional issues, such as thinness, weak incentives, limited entry and the potential for traders with biases or ulterior motives - raising questions about how well these markets will perform. We examine data from prediction markets run by Google, Ford Motor Company and an anonymous basic materials conglomerate (Firm X). Despite theoretically adverse conditions, we find these markets are relatively efficient, and improve upon the forecasts of experts at all three firms by as much as a 25\% reduction in mean squared error. The most notable inefficiency is an optimism bias in the markets at Google. The inefficiencies that do exist generally become smaller over time. More experienced traders and those with higher past performance trade against the identified inefficiencies, suggesting that the markets' efficiency improves because traders gain experience and less skilled traders exit the market.
Book Synopsis Individual Preferences, Organization, and Competition in a Model of R&D Incentive Provision by : Nicola Lacetera
Download or read book Individual Preferences, Organization, and Competition in a Model of R&D Incentive Provision written by Nicola Lacetera and published by . This book was released on 2014 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: Understanding the organization of Ramp;D activities requires the simultaneous consideration of scientific workers' talent and tastes, companies' organizational choices, and the characteristics of the relevant industry, in particular the competitive pressure. We develop a model of the provision of incentives to corporate scientists, in an environment where (1) scientists engage in multiple activities when performing research; (2) knowledge is not perfectly appropriable; (3) scientists are responsive to both monetary and non-monetary incentives; and (4) firms compete on the product market. We show that the degree of knowledge spillovers and of market competition both affect the incentives given to scientists, and these effects interact. First, high knowledge spillovers lead firms to soften incentives when product market competition is high, and to strengthen incentives when competition is low. Second, the relationship between the intensity of competition and the power of incentives is U-shaped, with the exact shape depending on the degree of knowledge spillovers. We also show that the performance-contingent pay for both applied and basic research increases with the non-pecuniary benefits scientists obtain from research. We discuss the implications of our findings for empirical research as well as for management and public policy.
Book Synopsis The Determinants of Incentive Intensity in Group-Based Rewards by : Todd Zenger
Download or read book The Determinants of Incentive Intensity in Group-Based Rewards written by Todd Zenger and published by . This book was released on 2000 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: Higher-powered incentives have spread to a broader subset of employees within hierarchies, largely through group-based pay plans such as profit sharing, gainsharing, and team-based rewards. Yet, in most organizations, the incentive intensity of group rewards, like the incentive intensity of individual rewards, remains low. This paper explores the determinants of incentive intensity in group-based rewards. We draw upon agency theory for hypotheses and test these with a sample of 663 group-based pay plans. We find that incentive intensity is higher when groups are small, when plans need not measure quality, and when management participation is high. We also find that plans embedded in small firms and plans with longevity have higher incentive intensity.
Book Synopsis The Economics of the Business Firm by : Harold Demsetz
Download or read book The Economics of the Business Firm written by Harold Demsetz and published by Cambridge University Press. This book was released on 1997 with total page 196 pages. Available in PDF, EPUB and Kindle. Book excerpt: The essays in this volume discuss the theory of the business firm and its applications in economics.
Book Synopsis Merger Incentives of Cost Asymmetric Firms Under Production Differentiation by : Xia Li
Download or read book Merger Incentives of Cost Asymmetric Firms Under Production Differentiation written by Xia Li and published by . This book was released on 2012 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This report examines merger incentives of cost asymmetric firms under product differentiation and their welfare implications. Considering a simple contract under which merger profit is distributed according to the proportions of differential marginal costs between duopolistic firms, we show in a stylized model that for almost all parameter ranges (in terms of market competition intensity and marginal cost differential), a low-cost firm may have no incentive to merge with a high-cost firm whereas the high-cost firm always finds merger to be profitable. Only when marginal cost differential is sufficiently low and the degree of product similarity is sufficiently high will both the low-cost firm and the high-cost firm share the common interest in merger. On the other hand, the merger equilibrium is not welfare-improving, regardless of whether the firms initially compete in quantities or prices. Viewed from the perspective of production efficiency, mergers with differentiated products thus create a fundamental conflict between the maximization of consumer and social welfare and the maximization of firm profits. We also examine the scenario that merger takes place when merger profit exceeds the sum of firm profits under duopoly, without considering how merger profit is distributed between the firms. We discuss the conditions under which mergers may or may not be welfare-improving.
Book Synopsis The Theory of the Firm by : Nicolai J. Foss
Download or read book The Theory of the Firm written by Nicolai J. Foss and published by Taylor & Francis. This book was released on 2000 with total page 360 pages. Available in PDF, EPUB and Kindle. Book excerpt:
