Payment Incentives

Question 1

PA Framework = The agents utility function

Answer 1

U = u(w) - c(e)

Question 2

PA Framework = The expected revenue given effort?

Answer 2

P0Rh + (1-P0)Rl if e=0
P1Rh + (1-P1)Rl if e=1

Question 3

PA Framework = If firm wants to exert low effort what is the equation?

Answer 3

w* is u(w*) - c(e) = ubar

Question 4

PA Framework = If firm wants to exert high effort. What determines these wage levels?

Answer 4

paying wl and wh.
- Determined by the Individual Rational Constraint and the Incentive Compatible Constraint
- It is where both are balanced

Question 5

PA Framework = What is the IR equation

Answer 5

P1.u(wh) + (1-P1).u(wl) - c(1) = ubar

Question 6

PA Framework = What is the IC equation

Answer 6

(P1-P0)(u(wh) - u(wl)) = c(1) - c(0)

Question 7

PA Framework = The final determining equation for fixed wage vs performance pay

Answer 7

What every is greatest
-PP
P1(Rh - wh) + (1-P1)(Rl - wl)
-Fixed wage
P0(Rh) + (1-P0)(Rl) - w*

Question 8

Betrand and Mullainathan 2001 = What is the main identification strategy of this paper and what is the primary question?

Answer 8

Are CEOs rewarded by luck?
- when the firm is performing well due to luck does this mean the CEOs pay increases.
Using the IV for ObsLuck in a 2SLS => first ObsLuck of Perf and then Perf on CEOPay.

Question 9

Betrand and Mullainathan 2001 = what are the main results of the paper?

Answer 9

-A 1% increase in performance; 0.8% CEO Pay
- A 1% increase in performance due to luck; 2.15% CEO Pay
-Also true increases for luck in exchange shocks and overall performance

Question 10

Betrand and Mullainathan 2001 = what is the extended test post regression in the paper? What was the result of this test? What was the final pay conclusion and intepretation of results?

Answer 10

How does governance within the firm impact CEOs pay due to luck
-Firms with stronger governance, luck does not matter as much.
-The intepretation was skimming from CEOs in poor governance firms.
-Asymmetry apparent too.

Question 11

Lazear 2000 = What was the setting of the paper? What were the initial results?

Answer 11

-Autoglass company switching from paid-per-hour to performance pay
-36% increase in productivity as a result. This is seen through N units installed.

Question 12

Lazear 2000 = What are the possible reasons for the increase in productivity?

Answer 12

• Spurious correlation through better workers receiving pp first can be ruled out as each stage of implementation was across heterogenous regions.
  -Sorting by good workers joining the firm and bad workers leaving as a result of the pp
• around half of the increase in productivity is due to this when controlling for worker FEs.

Question 13

Lazear 2000 = what are the findings for persistance and impact on wages?

Answer 13

-the effect doesn’t decrease over time and is persistant
-wages for workers who came from fixed wage before pp saw 10% rise income.
- 36% in productivity and 10% in income payments meant the scheme was highly profitable for the firm.

Question 14

Bandiera et al (2007) = what is the setting and main question of the paper?

Answer 14

fruit picking farm where managers monitor workers and select who go out in the fields to work.
-Managers are introduced to a PP scheme where two possible effects may have.
-targeting and selection effects.
The paper looks at how managers PP affect performance of the business

Question 15

Bandiera et al 2007 = what are the findings of this paper?

Answer 15

-Bonuses increase average productivity and increase dispersion.
-Both targeting and selecting effects are apparent.

Question 16

What are issues with PP?

Answer 16

-crowds out intrinsic motivation
-hard to measure as most firm tasks are in a team.
-Free riding in teams may be incentivised

Question 17

Bandiera et al 2006 = What is the main setting of the paper and what is the primary question?

Answer 17

using a fruit picking farm, the authors use the current relative non-coop wage scheme transitioning to a piece rate system as a way to determine the effects of absolute vs relative pp.

Question 18

Bandiera et al 2006 = what were the results of this paper? what is the intepretation

Answer 18

• the introduction of the piece rate system increased productivity by 50%
  -even more distribution under absolute pay
• Due to social sanctions, workers will put in less effort when their actions impact coworkers negatively.

Question 19

Bartel et al 2017 = what was the main strategy and questions in this paper?

Answer 19

this paper was to investigate how changing to a more team based payment incentive scheme would impact leaders and associates in a law firm. Using a before/after policy change to calculate the effects.

Question 20

Bartel et al 2017 = What were the main results of the paper?

Answer 20

-Leaders reduced their individual billable hours to favour more team based activities
-Leaders delegated more to associates who increased their client work as a result of the scheme
-Pay change had no significant effect on leaders revenues whilst associates revenues increased as a result.
-Switching to a team incentive structure will reduce cost of helping others in the team.

Question 21

Bandiera et al 2013 = what is the main question of this paper and what is the identification strategy?

Answer 21

The paper looks at how different team incentives change the effort and the composition of team in a self-select environment.
- treatment occurs first to have rank incentives, then a tournament incentive with cash prize.
-The idea is that as treatment goes on the incentive to pair yourself with friends decreases

Question 22

Bandiera et al 2013 = what are the results and implications of this paper?

Answer 22

-Teams reduced the number of friends as treatments went on
-more assortative matching occurs through a more dispersed ability spread across teams (some teams really good, some shit)
-tournament treatment incentivises productivity increase; whereas ranking incentive did not.
-evidence suggests that as friends become removed from teams the social mechanisms preventing free riding decrease.