Dynamic incentive contracts with termination threats

We consider a dynamic moral hazard model where the principal offers a series of short-run contracts. We study the optimal mix of two alternative instruments for incentive provision: a performance based wage (a “carrot”) and a termination threat (a “stick”). At any given point in time, these instruments are substitutes in the provision of incentives. We are particularly interested in the dynamic interaction of these two instruments. Both carrot and stick are used more intensively as the agent approaches the end of his finite life. The sharing of the surplus of the relationship plays a key role: a termination threat is included in the optimal contract if and only if the agent’s expected future gain from the relationship is sufficiently high, compared to the principal’s expected future gain. Also, a termination threat is more likely to be optimal if output depends more on “luck” than on effort, if the discount factor is high, or if the agent’s productivity is low. The model, provided that the optimal contract includes a termination threat, essentially provides an alternative explanation for upward-sloping wage profiles even in the absence of full-commitment.     

Verifiable wage offers and recontracting: effect on wage and consumption profiles

This paper analyzes the effect of recontracting and matching verifiable wage offers on the intertemporal structure of contract wage and consumption profile for a two-period economy. A contract firm provides specific training for a worker during the first period, which increases his productivity if he stays in the second period, but the worker may quit to accept an alternative wage offer after a successful search. Wage offers are private to the worker but can be presented to the contract firm for matching. This paper shows that when capital markets are imperfect and wage offers are verifiable, the contract firm recontracts and matches any wage offers the worker receives up to the second-period productivity. The ex ante contract wage profile will be flat. Inefficient quits will be eliminated and there will be complete ex ante consumption smoothing. It is significant to note that the result of rising wage profile derived in numerous contract models is fragile with respect to assumptions on mechanism of interfirm labor mobility.     

Altruism and Relational Incentives in the Workplace

This paper studies how altruism between managers and employees affects relational incentive contracts. To this end, we develop a simple dynamic principal–agent model where both players may have feelings of altruism or spite toward each other. The contract may contain two types of incentives for the agent to work hard: a bonus and a threat of dismissal. We find that altruism undermines the credibility of a threat of dismissal but strengthens the credibility of a bonus. Among others, these two mechanisms imply that higher altruism sometimes leads to higher bonuses, whereas lower altruism may increase productivity and players' utility in equilibrium.     

以作业预算为基础的业绩合同管理运行研究

以作业预算为基础的业绩合同是建立企业内部激励约束机制的依据,并可以将代理人的报酬与其所做的努力联系起来,但业绩合同必须具有可操作性和有效性。本文从业绩合同管理模式、管理工具、过程控制和业绩考评等方面对业绩合同管理的运行进行了分析,从而有助于提高业绩合同的可操作性和有效性。     

The Ignored Performance Measure

This paper studies a setting in which a risk-averse agent must be motivated to work on two tasks: evaluating a potential project and, if the project is adopted, implementing it. Although a performance measure that is informative of an agent's action is typically valuable because it can be used to improve the risk sharing of the contract, this is not necessarily the case in this two-task setting. I provide a sufficient condition under which a performance measure that is informative of the agent's implementation effort is worthless for contracting despite the agent being risk averse. This shows that information content is a necessary but not a sufficient condition for a performance measure to be valuable.     

Stochastic costly state verification and dynamic contracts

I consider a dynamic costly state verification environment in which a risk-averse agent enters into a contract with a risk-neutral principal. The agent has random income which is unknown to the principal but can be verified at a cost. The principal can commit to executing random verifications.I extend the standard recursive methods to study the problem and show that it is optimal to set verification probabilities strictly less than 1. If the agent׳s absolute risk aversion declines sufficiently slowly, the principal will use verification regardless of its cost. If the agent's income is verified then he would get consumption and continuation utility strictly higher than if his income were not verified.     

Multiproject team assignments

We consider expected profit maximizing mechanisms for a principal who has to allocate a group of agents among a number of projects, assuming that the principal has incomplete information about each agent's ability type, and the agents follow the Bayes-Nash or the dominant strategy equilibrium behavior. We find that while expected profit maximizing mechanisms are similar to the optimal auction (Myerson, 1981), the incentive compatibility constraints are much more restrictive. Interestingly, these constraints are satisfied if each agent's characteristics change in a consistent manner not only with types, but also from project to project. Received: 30 April 1997 / Accepted: 22 December 1998     

Wage Growth Implications of Fixed-Term Employment: An Analysis by Contract Duration and Job Mobility

Focusing on Spain, where fixed-term workers account for a third of the wage and salary workforce, we examine the wage growth implications of fixed-term employment of varying duration while distinguishing between wage growth occurring on-the-job versus via job mobility. Wage growth among employees with indefinite work contracts largely occurs via job mobility, whereas fixed-term workers gain via job mobility as well as on-the-job. Consequently, job stayers with fixed-term contracts a year ago narrow their wage gap with respect to similar counterparts with indefinite-term contracts. Yet, this effect is solely driven by the 10.5 percentage points higher wage growth experienced by fixed-term workers with 6-months contracts able to keep their jobs beyond their initial contract period. Given the limited number of short-term temporary workers in those circumstances, the overall wage gap between past fixed-term and indefinite-term workers is unlikely to vanish in the near future.     

Fairness in Delegated Bargaining

This article examines whether a principal prefers to hire a fair or a selfish agent. A fair agent cares to some extent for the well-being of other people and thus he also cares for the principal. Therefore, if the agent performs individual work, the principal is always better off to hire a fair agent. However, we show that when a third party with conflicting interests is introduced, it may be advantageous for the principal to hire a selfish agent. The reason is that the selfish agent will be a tough bargainer not only when negotiating his employment contract with the principal but also when dealing with the third party, for example, when selling the principal's product to a buyer.     

Task Assignmentand Agency Structures

This paper considers an agency model in which a principal delegates an agent authority to choose investment projects. The performance of the project depends stochastically on the agent's evaluation and operating efforts. The paper examines the conditions under which the principal prefers to assign production to a second agent. It is shown that the tasks will be assigned to two agents of the agent chooses an unobservable operating effort. The tasks will be assigned to one agent if the agent's evaluation and operating efforts are both unobservable and if disutilities of efforts are large relative to the profit from the risky project.     

Limited Liability and Bonus Contracts

This paper studies the nature of incentive contracts between a risk-neutral principal and a risk-neutral agent under the constraint that the agent's liability is limited. A necessary and sufficient condition is derived for the existence of a first-best contract under this constraint, and a bonus-based contract is shown to be the most efficient contractual form. Implications of bonus contracts are also discussed.     

Voluntary internalisations facing the threat of a pollution tax

This paper investigates how the threat of a pollution tax fosters voluntary arrangements under private information and how such arrangements (of the take-it-or-leave-it type) will look like. The objective is (i), to address a topical and policy relevant problem, and (ii), to highlight that the optimal contracts exhibit substantial variations, degrees of complexity and uncommon features. If the pollutee offers an arrangement (and this is the more likely and also more interesting case) the spectrum of solutions covers six different cases: 'no distortion at the top', 'no distortion at the bottom', 'no distortion in the interior' and a boundary solution (a pseudo contract of duplicating the tax outcome) applicable either in all instances of the agent's benefit or coupled with one of the conventional mechanisms. If the polluter offers a contract, the optimal incentive scheme is countervailing with the consequence that the signs of the payments are reversed, that the property of no distortion holds at both ends and that the polluter's best strategy is to duplicate the tax outcome if the actual damage is around the expected value. The government's threat encourages contracting and improves the allocation beyond what an actual intervention could achieve. This provides a potential role for governments in an otherwise Coasean framework. Received: 28 March 2003, Accepted: 10 October 2005 JEL Classification: D62, D82 Both authors acknowledge (exceptionally) helpful and detailed comments from an anonymous referee and suggestions from an associate editor of the journal.     

Renegotiation Facilitates Contractual Incompleteness

Attempts to economize on bargaining costs imply that two parties may write a contract which is incomplete in the sense that each party tacitly cedes some decision rights to the other. If decision makers can be disciplined by the threat of ex post renegotiation of decisions initially delegated to them, contracts may be even more incomplete. In the limit, the parties may leave all nonprice decisions out of the contract. By thus arguing that the threat of renegotiation facilitates contractual incompleteness, the paper reverses the direction of causality stressed by the literature.     

Delegation of risky activities

This paper studies the delegation contract of a risky activity under the presence of adverse selection and moral hazard. The problem is posed as providing incentives from the principal to the agent to enhance the protective action of the agent through payment schemes. Given non‐bankruptcy of both the principal and the agent, the principal rewards the agent if no accident occurs but penalizes the agent if an accident occurs. Given bankruptcy of either the principal or the agent, regardless of the agent's risk type, the agent is only rewarded with the same amount of remuneration and not penalized if the accident occurs. The social welfare level resulting from contracting processes depends on the asset levels of both parties and the agent's technology to reduce risks of the activity. Copyright © 2005 John Wiley & Sons, Ltd.     

An extortionary guerrilla movement

This paper models an extortionary relationship between a pipeline operator and a guerrilla movement. Payment and attack decisions are modeled as an infinite-horizon Markov decision process, where each period the oil company chooses to pay or not pay an extortion demand and the movement decides to attack or not. Decisions depend on the level of single-period payoff and discounted expected future payoffs. We estimate the model with pipeline attack data and compare parameters when the discount factor is changed. We reject a zero discount factor hypothesis, demonstrating that the movement's observed attack pattern is compatible with extortionary behavior. Copyright © 2007 John Wiley & Sons, Ltd.     

浅谈我国违法解雇期间工资支付法律问题探讨

我国大陆地区对于违法解雇期间的工资支付问题没有一个完善的法律体系,导致出现这一问题时,缺乏相关的法理依据和可借鉴的经验。本文以我国台湾地区为例,借鉴其法理和对事件处理的方法,对我国违法解雇期间工资支付问题进行了探讨。     

Organizations and overlapping generations games: Memory,communication, and altruism

This paper studies the role of memory and communication in overlapping generations (OLG) games between ongoing organizations. In each organization, each individual, upon entry into the game, replaces his predecessor who has the same preferences and faces the same strategic possibilities. An individual has no prior memory - that is, he does not directly witness the events that occur before his tenure. Instead, each individual relies on information about the past from his predecessor via cheap talk. This paper highlights the role of communication as a surrogate for memory.It has been shown elsewhere that Folk Theorems hold in OLG games with long enough lived individuals who can perfectly observe the past. However, the Folk Theorem fails for many games when individuals have no prior memory. We show that for OLG games without prior memory but with costly communication, a Folk Theorem holds only when there is some altruistic link between cohorts in an organization. Our main result asserts that if communication costs are sufficiently small, or if altruistic weights on successors are sufficiently large, then a strongly stationary Folk Theorem (i.e., equilibrium payoffs are time invariant) obtains if a managers message is public information. The equilibria in this Folk Theorem require a special form of intergenerational sanctions. In these sanctions, punishment is sometimes carried out long after both victim and perpetrator have left the game. Without this special structure, altruism may in fact destroy cooperation when it would otherwise be possible.Received: 18 April 2003, Accepted: 20 October 2003, JEL Classification: C72, C73, D74, D82We have benefitted from helpful comments and conversations with Luca Anderlini, Kirk Bailey, Hans Haller, Matthew Jackson, and Takashi Shimizu, and numerous seminar participants. This research is partially supported by the National Science Foundation, and by grants-in-aid for scientific research of the Ministry of Education of Japan. Of course, any remaining error is our own.     

Managerial Incentives Based on Acquisition of Information

In a moral hazard setting, we model the fact that the agent may get private signals about the final outcome of his effort before the public realization of this outcome. Actions affect both the distribution of the outcome and the quality of the agent's private information. We compare simple contracts, based on output only, with revelation contracts, based on output and messages about signals. Revelation contracts give the agent some discretionary power during the course of the relationship; they are optimal if and only if lowering effort does not increase the quality of private information in the sense of Blackwell (1953). In the context of managerial compensation schemes, the revelation contracts we analyze can be viewed as allowing the agent to exercise an option on the final profits before the realization of these profits. The theory thus provides an alternative justification of the widespread use of stock options in managerial compensation schemes, as opposed to compensation schemes that rely only on salary, bonus, and (restricted) stock plans.     

Most-Favored-Customer Clauses and Multilateral Contracting: When Nondiscrimination Implies Uniformity

DeGraba and Postlewaite (1992) show that the seller of a durable input can solve the time inconsistency problem by offering most-favored-customer (MFC) protection to buyers. McAfee and Schwartz (1994) show that if a supplier sells inputs to competing firms using two-part tariffs, MFC protection that allows a firm to replace its contract with a contract executed by any other firm will not solve the commitment problem, and argue this implies managers cannot use MFCs as a strategic commitment device in complex contracting situations. This paper shows that if the profits of the seller and the buyers are monotonic in each term of the contract, then applying MFC protection to each term of a contract allows a manager to solve his commitment problem in complex contacting situations. We show that "standard" contract arrangements (two-part tariffs, declining block tariffs, and royalties as a percentage of sales) meet this condition.     

Habit formation and wage determination

We analyse the implications of habit formation relating to wages in a multiperiod efficiency‐wage model. If employees have such preferences, their existence provides firms with incentives to raise wages and reduce employment over time. Greater intensity does not necessarily have the same consequences, because wage adjustments counteract the initial level impact. The firm's response additionally depends on the wage dependency of dismissal costs, because such costs make an increasing wage profile over time more attractive and mitigate the effects of greater intensity of habit formation. We further show that short‐lived productivity shocks have long‐lasting wage and employment consequences. Moreover, habit concerns by firm owners reduce wages.