ECON 365 Final Flashcards
What is intrinsic motivation?
Interested in the job as such
What is extrinsic motivation?
- Pay
* Work environment, non-pay characteristics, benefits
What is a principal in business?
Firm owner, manager
What is an agent in business?
the worker
What is the goal of the principal?
Wants to maximize value of the firm, influenced by effort of worker
What are the coals of an agent?
wants to maximize pay
What is the out based measurement of performance?
- Grade received in a course
* sales, share price, costumer satisfaction
What is the in based measurement of performance?
- Number of hours studied
* effort, working hours, number of jobs done
Accounting figures is quantitative or qualitative evaluation?
quantitative
Evaluation by supervisor is quantitative or qualitative evaluation?
qualitative
The promotion tournament is an alternative evaluation from quantitative or qualitative, What is it called?
ordinal
What type of risk are the following:
- variation in measured performance, the worker cannot control
- performance pay may reward lucky outcomes
- risk-averse workers need to be compensated for that by higher base pay.
Uncontrollable risk
What type of risk are the following:
- if the worker works hard, pay raises
- No problem for workers, because under his own control.
Controllable risk
What type of rate is the following:
- payment depends on input (time spent)
- common in white color jobs
- also in candy, chemicals, steel industry
Time Rate
What type of rate is the following:
- Payment depends on output (amount produced)
- example: Car sales man
- popular in footwear, garment production
Piece Rate
___________ can be thought of as a tournament
Promotion
___________ are rewards are fixed in advance and are independent of absolute performance.
Monetary
Level of effort depends on what between the winner’s and loser’s prizes.
Spread
When you _____________ the spread in a prize you get more effort
spread
Most white collar workers don’t work for ________ rate.
piece
______- of wages induces participation in tournament.
level
_______ of wages induces level of effort.
Spread
The bigger the ____________ higher is the incentive to _____ the game.
spread
win
________ it is easier to observe relative than absolute performance.
Ease of evaluation
The following is an example of what:
looking at the relative size of a pile of coal is easier than to weight it.
Ease of evaluation
___________ that influence all participants equally.
Eliminates effect of external forces
The following is examples of what:
Bad weather, economic downturn
Eliminates effect of external forces.
____________ is some supervisors are more easy to satisfy than others.
Neutralizes subjective supervisory evaluation
________ is the number of promotions predetermined.
Eliminates moral hazard on the side of the firm
When tournaments are based on __________ then the person will not try as hard.
luck
The following are examples of tournament with the role of what?
- Production or market uncertainty, negative noise
- Measurement errors
- The relation between effort and return to effort is weaker
- The higher the noise, the lower the effect of the workers
Luck
The following are examples of tournament with the role of what?
- If competing people have different abilities and they know this effort will be reduce.
- People competing at a particular level should have similar abilities and should be evenly matched with those against they compete.
Ability
______ ability people may give up when they have a small chance of winning.
Lower
________ ability people may work less hard because they know that they will win anyways
Higher
The length of time between promotions has _________ and ________
Costs
Benefits.
____________ is the longer time allows better decisions.
Benefit
__________ is the longer time wastes time as good workers who are needed at the top.
Cost
Each promotion from one level to the next carries with it an _______.
identical pay raise.
Typically, __________ percentage of workers get promoted in ___________ tier promotions.
Higher
Lower
Getting a promotion is riskier for ___________ position. Therefore pay gap must be ___________ to get high efforts.
High
higher
When you move up the chain the probability of keep moving gets _______________
smaller
Total reward= monitory reward + option value
Monitory rewards has to be __________
Option Value is ____________
No___________values for top level
Increased
Lowered
Option
___________ avoid the problem of moral hazard of the worker (sharking)
Piece rate
__________ happens when moral hazard exists also on side of employers.
Ratchet effect
What solves the following problems:
- Prize is fixed in advance, no cheating possible
- Firm must promote one of the candidates
- Firm has incentive to promote the best candidate
Tournaments
_____ is used if hard to measure absolute output but easy to rank workers
Tournaments
__________ is relative performance is easier to observe and verify and generally less risky.
Tournaments
___________ remove link between average worker pay and external shocks.
Tournaments
The following is a disadvantages of what:
- promotion is a discrete incentive
- Encourages competition vs. team work
- Workers might collude to keep down average outputs.
tournaments
____________ is when both competitors work long hours to compete with one another for the same prize.
Rat Race
The following is what:
- insiders, you may want to take an outsider from time to time.
- likely if the contestants neither know each other nor the total number of contestants.
Collusion
With in a tournament compensation will do the following three things.
- no cooperation with colleagues
- sabotage of others efforts
- lobbying to the supervisors.
Hawks or Doves:
____________ is peaceful cooperators
____________ are aggressive sabotages.
Dove
Hawks
How should you sort workers into separate tournaments?
by not only ability, but aggressiveness
What type of workers will be more likely to do more sabotage against a cooperative worker in a tournament?
aggressive or hawks
For ________ no problem of sabotage, wage spread can be kept high.
doves
Offered prize should be ___________ matched hawks than for matched doves.
lower
Will hawks and doves self-sort as segregation is required?
No
Why would a hawk would doves?
because they will make them look better.
When people unlikely to get promoted, what is the alternative?
shirking
When dose sharking get worse?
When the age of the worker increases
What theory states the following?
- underpay worker when young and overpay when old
- So firm dose not lose money, and worker still, overall worker gets paid present value of VMP
- Older worker now have less incentive to shirk because firm has your money even near retirement.
Delayed compensation Theory
What is the slope in the pay for performance relation. Measures the change in rewards for a given change in performance. The greater the slope , the greater the intensity. It depends on several factors including employee risk aversion, employee responsiveness to incentives, and incremental profits generated by extra effort.
Incentive intensity
What is the tendency for performance standard to increase after a period of good performance. If employees foresee this, it reduces their incentives because to some extent they are penalized for good performance.
Ratchet effect
What is the judgement of an employee’s performance for the purposes of feedback and/or incentives.
Performance evaluation
What is an unusual organizational form that combines principles about incentives with those about decision making and use of specific knowledge.
Franchising
What is the right to buy a share of an underlying asset at a predetermined price before a preset deadline.
Call option
What is the stated price for which one share of the underlying stock may be purchased or should upon exercise of an option contract.
Strike price
What is the stated price per share for which underlying stock may be purchased or should by the option holder upon exercise of the option contract.
exercise price
What is a stock option is said to be out of the money when its exercise price exceeds the market price of the underlying stock.
Out of the money
What is the transfer of a certain economic value to an entity after a specified period of time. In personnel, examples include the right to exercise stock options or the right to earn pension benefits.
Vesting;
What is the right to sell a share of an underlying assets at a predetermined price before a preset deadline.
put option
The following is an example of what:
- sometimes firms will grant stock as reward but more typically grant stock options.
- useful only for senior employees who feel that their efforts could move stock price
Employee stock option
What is the following?
- not trad-able
- typically have a long (3-5) years of vesting period
Employee Stock option
If the firm sets ________ strike prices and grants ______ options, the worker will capture greater share of the profit.
higher
more
The following is an example of what?
- may induce workers to take more risks because if the stock price never changes and option is out of the money worthless
Disadvantages of ESO
What is the risk premium that must be paid to the employee higher than risk premium demanded by investors.
expensive
The following is examples of what?
- workers most optimistic about the firm’s future will accept the pay package and stay
- ESO are paid to work gradually
- If you leave you must give up unvested options
- discourages turnover
self selection
What is the following?
- encourages employees to work harder to increase stock price
incentive
If the time rate firm changes to piece rate, then average net output per worker in the town will
a. fall
b. rise
c remain the same
d cannot be determined
a
What is a rate for work which is calculated as money per hour or per week, and not money for work completed
time rate
What is the payment by result wage determination system in which the employee is paid for each unit of production at a fixed rate.
piece rate
What is the tendency when faced with two choices with the similar expected return to prefer the one with the low risk.
risk averse
What is the focusing on the wrong type of effort because the performance evaluation weights different type of effort in appropriately compared to the firm actual valuation of those efforts.
Distortion
Seniority pay is
a. a way for firm to show appreciation to older employees
b. a way for firms to discriminate against younger employees
c. mandated by the age discrimination act
d. a way to prevent shirking
e. all the above
d
The amount of effort put in by the players in a tournament setting.
a. increase with the prize
b. decreases with prize
c. depends on whether player are hawks or doves
d. both (a) and (c)
e both (b) and (c)
D
Large pay raises give to CEO can be explained by
a. piece rate
b. seniority pay
c. tournament
d. stock-options
e. all of the above
c
What is it when on performance is measured relative to the performance of coworkers.
- measures can insulate the employees against uncontrollable risk that are common across employees
- increase their exposure to risk that are idiosyncrasy to other employee
relative performance evaluation
What is indicates one’s position in a numbered series. The order matters but not the distant between competitors.
Ordinal ranking
What is the position in a quantifiable series of numbers. The order and the distant between competitors are both specified.
Cardinal ranking.
What is the workers compete for promotion award to the worker with the high performance
Tournament
What is the judgement of an employee’s performance for the purposes of feedback and incentives
performance evaluation
What is incentives derived by the effect of current performance on future rewards .
Career concerns
What is usually refers to the effects of a worker’s current performance on job market opportunities in the future, but can include other type of rewards.
career concerns
The mandatory retirement system that exists in many counties can be explained by
A tournament theory
B Efficiency wage theory
C Delayed Compensation theory
D None of the Above
C
What is the theory in personnel economics used to describe certain situations where wage differences are based not on marginal productivity but instead upon relative differences between the individuals
Tournament Theory
What is hypothesis argues that wages, at least in some markets, form in a way that is not market-clearing.
Efficiency wage theory
In which professions employers selling the job to the employees are relatively common?
a) doctors
b) engineers
c) securities traders
d) all of the above
c
The amount of effort put in by the players in a tournament setting
a) increase with the prize
b) decreases with prize
c) does not vary with prize
d) both (b) and (c)
a
Any mechanism that provides incentive to workers (such as piece rate) is
a) associated with more risk in worker pay
b) associated with less risk in worker pay
c) is not associated with risk
d) can’t tell
a
One argument against using a profit-sharing scheme is the potential for free-riding. In this situation, free-riding refers to:
a) A worker assumes that even if he does not work hard, other workers will work and therefore he will get his share anyway.
b) A worker not providing effort because he doesn’t care about his wages.
c) The firm not honestly reporting its profits.
d) Both (a) and (b).
a
Which compensation scheme should not be used when one worker can sabotage another worker?
a) time rate
b) piece rate
c) tournament
d) delayed compensation contract
e) none of the above
c
Piece rates typically
a) encourage productivity.
b) are more common than time rates.
c) are associated with the worker incurring less risk concerning one’s income.
d) are more common among higher paying jobs.
e) do not reward skill.
a
In a delayed compensation scheme
a) an older worker may get paid more than younger worker because older worker is more productive
b) an older worker may get paid less than younger worker even though older worker is more productive
c) an older worker may get paid more than younger worker even though both are equally productive
d) older workers and younger workers get the same wage
e) both (a) and (c)
a
