A Foundation for Efficiency Wage Contracts

2018 ◽  
Vol 10 (4) ◽  
pp. 248-288
Author(s):  
John Y. Zhu
Keyword(s):  
Performance Measures ◽  
Efficiency Wage ◽  
Optimal Contract ◽  
Prior Work ◽  
Private Monitoring ◽  
Equilibrium Refinement ◽  
Outside Option ◽  
Wage Contracts ◽  
Wage Contract

In many jobs, the worker generates only subjective performance measures privately observed by the employer, and contracts must rely on employer reports about these measures. This setting is a game with private monitoring, and prior work suggests that the optimal contract may be complex and non-recursive. I introduce a novel equilibrium refinement and show that the optimal contract simplifies to an efficiency wage contract: The worker receives a wage above his outside option and reports take a pass-fail form. Each report depends only on performance since the previous report, and effort incentives are provided purely through the threat of termination. (JEL D86, J41)

Team Incentives and Bonus Floors in Relational Contracts

2020 ◽  
Vol 95 (6) ◽  
pp. 181-212
Author(s):  
Jonathan C. Glover ◽  
Hao Xue
Keyword(s):  
Performance Measures ◽  
Team Performance ◽  
Performance Measure ◽  
Relational Self ◽  
Relational Contracts ◽  
Optimal Contract ◽  
Agent Model ◽  
Strategic Complementarity ◽  
Multi Agent ◽  
The Individual

ABSTRACT Teamwork and team incentives are increasingly prevalent in modern organizations. Performance measures used to evaluate individuals' contributions to teamwork are often non-verifiable. We study a principal-multi-agent model of relational (self-enforcing) contracts in which the optimal contract resembles a bonus pool. It specifies a minimum joint bonus floor the principal is required to pay out to the agents, and gives the principal discretion to use non-verifiable performance measures to both increase the size of the pool and to allocate the pool to the agents. The joint bonus floor is useful because of its role in motivating the agents to mutually monitor each other by facilitating a strategic complementarity in their payoffs. In an extension section, we introduce a verifiable team performance measure that is a noisy version of the individual non-verifiable measures, and show that the verifiable measure is either ignored or used to create a conditional bonus floor.

Gaming Nonfinancial Performance Measures

2002 ◽  
Vol 14 (1) ◽  
pp. 119-133 ◽  
Author(s):  
Michael J. Smith
Keyword(s):  
Customer Satisfaction ◽  
Performance Measures ◽  
Performance Measure ◽  
Optimal Contract ◽  
Dual Nature ◽  
Agency Model ◽  
Current Period ◽  
Incremental Value ◽  
Nonfinancial Performance ◽  
Nonfinancial Performance Measures

This multitask agency model examines the use of nonfinancial performance measures. The first effort affects only current-period profit. The second effort affects only customer satisfaction, which increases future profits. The third effort (shifting effort) simultaneously affects both performance measures, increasing one and decreasing the other. In some cases, shifting increases the principal's expected surplus. In others, the agent uses it to “arbitrage” the contract by shifting units into the more heavily weighted performance measure. Shifting's dual nature implies that it can either increase or decrease the incremental value of customer satisfaction as a performance measure. The optimal contract may entail a negative weight on customer satisfaction.

Risk Aversion and the Efficiency Wage Contract

Labour ◽  
2004 ◽  
Vol 18 (1) ◽  
pp. 53-73 ◽  
Author(s):  
Ouassila Chouikhi ◽  
Shyama V. Ramani
Keyword(s):  
Risk Aversion ◽  
Efficiency Wage ◽  
Wage Contract

scholarly journals Relational incentives in Chinese family firms

2011 ◽  
Vol 58 (4) ◽  
pp. 511-524
Author(s):  
Jiancai Pi
Keyword(s):  
Theoretical Analysis ◽  
Family Firms ◽  
Chinese Language ◽  
Managerial Compensation ◽  
Chinese Family ◽  
Efficiency Wage ◽  
Incentive Contract ◽  
Differential Mode ◽  
Compensation Contracts ◽  
Wage Contract

This paper mainly discusses the choice of managerial compensation contracts in Chinese family firms. Relation or guanxi in Chinese language is an important factor that should be considered because it can bring the shirking cost to the relation-based manager and the caring cost to the owner under Chinese-style differential mode of association (?chaxu geju?). Our theoretical analysis shows that under some conditions it is optimal for the owner to choose the efficiency wage contract, and that under other conditions it is optimal for the owner to choose the share-based incentive contract.

scholarly journals Contracting with Repeated Moral Hazard and Private Evaluations

2007 ◽  
Vol 97 (4) ◽  
pp. 1432-1448 ◽  
Author(s):  
William Fuchs
Keyword(s):  
Moral Hazard ◽  
Infinite Horizon ◽  
Comparative Statics ◽  
Finite Horizon ◽  
Discount Factor ◽  
Efficiency Wage ◽  
Optimal Contract ◽  
Short Term ◽  
Optimal Contracts ◽  
Repeated Moral Hazard

A repeated moral hazard setting in which the Principal privately observes the Agent's output is studied. The optimal contract for a finite horizon is characterized, and shown to require burning of resources. These are only burnt after the worst possible realization sequence and the amount is independent of both the length of the horizon and the discount factor. For the infinite horizon. it is shown that there is no loss from restricting the analysis to contracts in which the Agent receives a constant efficiency wage and no feedback until he is fired. Furthermore, optimal contracts cannot be replicated by short-term contracts. A family of fixed interval review contracts is characterized. Longer review intervals are preferable but harder to implement. Comparative statics on the review length are carried out. Finally, these contracts are shown approximate first best if players are very patient. (JEL D82, D86)

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