A comparison of cardinal tournaments and piece rate contracts with liquidity constrained agents

A celebrated result in the theory of tournaments is that relative performance evaluation (tournaments) is a superior compensation method to absolute performance evaluation (piece rate contracts) when the agents are risk-averse, the principal is risk-neutral or less risk-averse than the agents and production is subject to common shocks that are large relative to the idiosyncratic shocks. This is because tournaments get closer to the first best by filtering common uncertainty. This paper shows that, surprisingly, tournaments are superior even when agents are liquidity constrained so that transfers to them cannot fall short of a predetermined level. The rationale is that, by providing insurance against common shocks through a tournament, payments to the agents in unfavorable states increase and payments in favorable states decrease which enables the principal to satisfy tight liquidity constraints for the agents without paying any ex ante rents to them, while simultaneously providing higher-power incentives than under piece rates. The policy implication of our analysis is that firms should adopt relative performance evaluation over absolute performance evaluation regardless of whether the agents are liquidity (wealth) constrained or not.     

Introduction to the Symposium on Tournaments,Contests, and Relative Performance Evaluation

The papers in this symposium reflect several of the directions taken by current research on tournaments, contests and relative performance evaluation. The papers help us understand the implications of agent heterogeneity on the incentives of agents to perform or self‐select the offers designed for them. They encompass various issues such as career concerns and promotion incentives, interim disclosure of information obtained by the principal about agent performance, exposure to risk choices, and competing for talent.     

Do tournaments solve the adverse selection problem?

This paper provides a solution to a puzzle in the analysis of tournaments, that of why there is no agent discrimination or differential contracting in certain business practice settings. The paper examines the problem of a principal contracting with multiple agents whose activities are subject to common shocks. The presence of common shocks invites the use of relative performance evaluation to minimize the costs of moral hazard. But, in the additional presence of adverse selection, the analysis shows that there may be no need for ex ante screening through menus of offers. This is so because the principal becomes better informed ex post about agent types, via the realization of common uncertainty, and can effectively penalize or reward the agents ex post. Thus, unlike the standard adverse selection problem without common uncertainty where the principal always benefits from ex ante screening, it is shown that ex post sorting through relative performance evaluation reduces the scope for ex ante screening through menus, and can eliminate it completely if agents are known to not be very heterogeneous. This is consistent with observed practice in industries where the primary compensation mechanism is a cardinal tournament which is uniform among employees. The analysis connotes that by using relative instead of absolute performance measures, firms with employees who are not substantially heterogeneous not only can alleviate the agency problem, but there is also no need to extract the agents' ex ante private information about their innate abilities via a screening menu.     

Joseph Schumpeter and Thorstein Veblen on technological determinism,individualism and institutions

This article investigates Joseph Schumpeter's affinities with Thorstein Veblen with respect to technological change and determinism, the future of capitalism, individualism and institutions. From a methodological point of view, a common point in their analysis is their anti-teleological view regarding economics as a discipline. Also, in the Schumpeterian system, technology is the cornerstone of economic evolution and appears as the making of new combinations. In the Veblenian theoretical framework, the bearer of change is to be found, inter alia, in technology, just like in Schumpeter's works, although not without differences. They also share the opinion that technology revolutionises capitalism and has serious implications for its future as a system. Furthermore, regarding individualism, in his work Schumpeter stresses the importance of the social milieu on individual action, a fact which bears strong resemblance to the Veblenian notion of evolution as ‘depersonalized evolution’. In this sense, Schumpeter is very close to Veblen, although Schumpeter's approach could be classified in what is called institutionalist individualism, whereas Veblen could be classified as holist. Undoubtedly, the role of institutions is of great importance in both Schumpeter and Veblen. Ιnstitutions in the Schumpeterian schema play a central role closely related to the future of capitalism. Institutional and non-institutional factors enter into complex forms of interaction just like in Veblen's approach. There, institutions are part of the social milieu and their underlying framework, much wider than mere economic and social. Of course, the theoretical analyses of Schumpeter and Veblen are not devoid of differences springing mainly from their methodological approach such as the role of the individual in the capitalist process which is probably the most significant difference regarding the importance attributed to it in Schumpeter's early works. Also, the way technical change appears constitutes another difference. However, his views are quite close to Veblen's. After all, Schumpeter began to write in a social, political, theoretical and ideological environment at a time when evolutionary ideas dominated social thought.     

Performance Pay and Offshoring

In this paper, we construct a North–South general equilibrium model of offshoring, highlighting the nexus among endogenous effort‐based labor productivity and the structure of wages. Offshoring is modeled as international transfer of management practices and production techniques that allow Northern firms to design and implement performance compensation contracts. Performance–pay contracts address moral hazard issues stemming from production uncertainty and unobserved worker effort. We find that worker effort augments productivity and compensation of those workers assigned to more offshorable tasks. An increase in worker effort in the South, caused by a decline in offshoring costs, an increase in worker skill, or a decline in production uncertainty in the South, increases the range of offshored tasks and makes workers in the North and South better off. An increase in Southern labor force increases the range of offshored tasks, benefits workers in the North, and hurts workers in the South. International labor migration from low‐wage South to high‐wage North shrinks the range of offshored tasks, makes Northern workers worse off and Southern workers (emigrants and those left behind) better off. Higher worker effort in the North, caused by higher worker skills or lower degree of production uncertainty, decreases the range of offshored tasks and benefits workers in the North and South.     

Measures of Human Capital and Nonlinearities in Economic Growth

In this paper we study the relationship between human capital accumulation and economic growth using various measures of human capital frequently employed by researchers. We use semiparametric estimation techniques to uncover any nonlinearities that may exist. Using mean years of schooling measures of human capital we find a nonlinear effect on economic growth. There seem to be important differences in the growth effect of educational attainment by gender and level of education. Enrollment rates do not yield a nonlinear effect.     

Regulating Broiler Contracts: Tournaments versus Fixed Performance Standards

Grower discontent with tournaments as mechanisms for settling poultry contracts can largely be attributed to the group composition risk that tournaments impose on growers. This article focuses on the welfare effects of a widely advocated regulatory proposal to prevent integrator companies from using tournaments and replace them with schemes that compare performance to a fixed standard. The analysis shows that the mandatory replacement of tournaments with fixed performance standards, absent any rules that regulate the magnitude of the piece rate, can decrease grower income insurance without raising welfare. However, replacing tournaments with fixed performance standards can simultaneously increase income insurance and welfare, provided that the magnitude of the piece rate is also regulated.     

Berth scheduling by customer service differentiation: A multi-objective approach

In this paper the discrete and dynamic berth allocation problem is formulated as a multi-objective combinatorial optimization problem where vessel service is differentiated upon based on priority agreements. A genetic algorithms based heuristic is developed to solve the resulting problem. A number of numerical experiments showed that the heuristic performed well in solving large, real life instances. The heuristic provided a complete set of solutions that enable terminal operators to evaluate various berth scheduling policies and select the schedule that improves operations and customer satisfaction. The proposed algorithm outperformed a state of the art metaheuristic and provided improved results when compared to the weighted approach.     

Public infrastructure,input efficiency and productivity growth in the Canadian food processing industry

Canadian food processing is an important manufacturing industry, accounting for 13 percent of shipments. By its nature food processing depends on infrastructure capital. Our objective is to estimate infrastructure’s effects on input requirements, cost and productivity. The increase in capital and decrease in materials were respectively 2.5 and 3 times greater than the −0.07 infrastructure elasticity of labor. Infrastructure investment was cost-reducing by inducing reductions in employment and intermediate inputs. A 1 percent increase caused cost to decline by 0.16 percent. Infrastructure capital was a major contributor to productivity, annually contributing 0.5 percentage points. This was nearly double TFP growth.