Payment Incentives Flashcards
PA Framework = The agents utility function
U = u(w) - c(e)
PA Framework = The expected revenue given effort?
P0Rh + (1-P0)Rl if e=0
P1Rh + (1-P1)Rl if e=1
PA Framework = If firm wants to exert low effort what is the equation?
w* is u(w*) - c(e) = ubar
PA Framework = If firm wants to exert high effort. What determines these wage levels?
paying wl and wh.
- Determined by the Individual Rational Constraint and the Incentive Compatible Constraint
- It is where both are balanced
PA Framework = What is the IR equation
P1.u(wh) + (1-P1).u(wl) - c(1) = ubar
PA Framework = What is the IC equation
(P1-P0)(u(wh) - u(wl)) = c(1) - c(0)
PA Framework = The final determining equation for fixed wage vs performance pay
What every is greatest
-PP
P1(Rh - wh) + (1-P1)(Rl - wl)
-Fixed wage
P0(Rh) + (1-P0)(Rl) - w*
Betrand and Mullainathan 2001 = What is the main identification strategy of this paper and what is the primary question?
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.
Betrand and Mullainathan 2001 = what are the main results of the paper?
-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
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?
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.
Lazear 2000 = What was the setting of the paper? What were the initial results?
-Autoglass company switching from paid-per-hour to performance pay
-36% increase in productivity as a result. This is seen through N units installed.
Lazear 2000 = What are the possible reasons for the increase in productivity?
- 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.
Lazear 2000 = what are the findings for persistance and impact on wages?
-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.
Bandiera et al (2007) = what is the setting and main question of the paper?
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
Bandiera et al 2007 = what are the findings of this paper?
-Bonuses increase average productivity and increase dispersion.
-Both targeting and selecting effects are apparent.
What are issues with PP?
-crowds out intrinsic motivation
-hard to measure as most firm tasks are in a team.
-Free riding in teams may be incentivised
Bandiera et al 2006 = What is the main setting of the paper and what is the primary question?
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.
Bandiera et al 2006 = what were the results of this paper? what is the intepretation
- 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.
Bartel et al 2017 = what was the main strategy and questions in this paper?
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.
Bartel et al 2017 = What were the main results of the paper?
-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.
Bandiera et al 2013 = what is the main question of this paper and what is the identification strategy?
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
Bandiera et al 2013 = what are the results and implications of this paper?
-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.
