Employee Selection as a Control System

Theories from the economics, management control, and organizational behavior literatures predict that when it is difficult to align incentives by contracting on output, aligning preferences via employee selection may provide a useful alternative. This study investigates this idea empirically using personnel and lending data from a financial services organization that implemented a highly decentralized business model. I exploit variation in this organization in whether or not employees are selected via channels that are likely to sort on the alignment of their preferences with organizational objectives. I find that employees selected through such channels are more likely to use decision‐making authority in the granting and structuring of consumer loans than those who are not. Conditional on using decision‐making authority, their decisions are also less risky ex post. These findings demonstrate employee selection as an important, but understudied, element of organizational control systems.     

Deconstructing a Mortgage Meltdown: A Methodology for Decomposing Underwriting Quality

Technical progress in originating and pricing mortgages has enabled a trend since 1979 toward relaxed credit standards for lending, reflected in rising foreclosure rates. We develop a methodology for decomposing the trend in mortgage performance into a part due to economic conditions and a part due to underwriting changes, and provide natural metrics or indices of underwriting quality and economic conditions. The recent mortgage debacle can be attributed about equally to each factor. Important underwriting characteristics were eased in the 1990s, but the negative effects of lower standards were masked by strong local and national economic conditions. After 2002, there was little change in observable loan characteristics, but loan performance still eroded, even after controlling for the economic environment. Our evidence suggests that erosion after 2002 must have arisen from underwriting covariates that are unobservable to investors, consistent with the hypothesis that moral hazard in “nonagency” securitizations caused underwriting risks to be mispriced.     

PRODUCT VARIETY AND DEMAND UNCERTAINTY: WHY MARKUPS VARY WITH QUALITY*

We demonstrate that demand uncertainty can explain equilibrium product variety in the presence of sunk costs. Product variety is an efficient response to uncertainty because it reduces the expected costs associated with excess capacity. We find that within the firm's product line, the highest quality product has the highest profit margin but the lowest percentage margin, while the lowest quality product has the highest percentage margin but the lowest absolute margin. Both of these relationships are consistent with evidence available from marketing studies.     

The Effects of Labour on Accounting Choice in Canada

This study examines the effects of labour considerations on accounting choice in Canada. Two potential labour‐related incentives are considered: ability to pay and employee attraction and retention. Measures of these incentives are developed based on Canadian data: unionization for ability‐to‐pay incentives, and labour intensity and the percentage of white‐collar employees for the attract and retain incentives. Our results indicate that ability‐to‐pay incentives, measured by unionization, are not associated with depreciation policies in Canada. In contrast, the findings provide mixed support for the attract‐and‐retain perspective, because labour intensity was significantly correlated with these choices, while the percentage of white‐collar employees was marginally significant.     

Hyperbolic Discounting and the Phillips Curve

Using a standard dynamic general equilibrium model, we show that the interaction of staggered nominal contracts with hyperbolic discounting leads to inflation having significant long-run effects on real variables.