Investigating Corruption
Date Posted: Dec 14, 2004
Why incentive contracts and independent investigations may not be the perfect solution to the problem of bureaucratic corruption.
Agency theory has had little to say about the control of bureaucratic corruption, perhaps the greatest agency problem that exists. Prendergast considers the role of incentive contracting in reducing corruption through the use of independent investigations - a common way to monitor corruption.
In simple settings, bureaucratic corruption can be suppressed by rewar
Barter, Liquidity and Market Segmentation
Date Posted: Sep 01, 2004
This paper explores the private and social benefits from barter exchange in a monetized economy. We first prove a no-trade theorem regarding the ability of firms with double-coincidences-of-wants to negotiate improvements in trade among themselves relative to the market outcomes. We then demonstrate that in the presence of liquidity shocks, introducing a non-monetary exchange avoids this limitation and enhances trade by (1) generating liquidity and (2) by segmenting the market place into low-de
Consumers and Agency Problems
Date Posted: Feb 28, 2004
Consumers solve many agency problems, by pointing out when they believe that agents have made mistakes. I consider the role that consumers play in inducing efficient behaviour by agents. I distinguish cases where consumers have similar preferences to the principal, from those where they diverge. In the former case, allowing consumer feedback improves allocations, and increasing consumer information is unambiguously beneficial. Where consumers disagree with principals over desired outcomes, which
The Limits of Bureaucratic Efficiency
Date Posted: Oct 02, 2003
Bureaucracies tend to be used when consumers cannot be trusted to choose outcomes efficiently. But a primary means of bureaucratic oversight is consumer complaints. But this can give bureaucrats an incentive to inefficiently accede to consumer demands to avoid a complaint. I show that when this incentive is important, bureaucracies (efficiently) respond by (i) ignoring legitimate consumer complaints, (ii) monitoring more in situations in which it is not needed, (iii) delaying decision making "to
Contracts, Externalities and Incentives in Shopping Malls
Date Posted: Jan 14, 2003
This Paper demonstrates that mall store contracts are written to internalize externalities through both an efficient allocation and pricing of space and an efficient allocation of incentives across stores. Certain stores generate externalities by drawing customers to other stores, while many stores primarily benefit from external mall traffic. Therefore, to varying degrees, the success of each store depends upon the presence and effort of other stores, and the effort of the developer to attract
Contracts, Externalities, and Incentives in Shopping Malls
Date Posted: Nov 21, 2002
This paper demonstrates that mall store contracts are written to internalize externalities through both an efficient allocation and pricing of space, and an efficient allocation of incentives across stores. Certain stores generate externalities by drawing customers to other stores, while many stores primarily benefit from external mall traffic. Therefore, to varying degrees, the success of each store depends upon the presence and effort of other stores, and the effort of the developer to attract
The Tenuous Trade-off between Risk and Incentives
Date Posted: Oct 10, 2002
Empirical work testing for a negative trade-off between risk and incentives has not had much success: The data suggest a positive relationship between measures of uncertainty and incentives rather than the posited negative trade-off. I argue that the existing literature fails to account for an important effect of uncertainty on incentives through the allocation of responsibility to employees. When workers operate in certain settings, firms are content to assign tasks to workers and monitor their
Consumers and Agency Problems
Date Posted: Jul 26, 2002
Consumers solve many agency problems, by pointing out when they believe that agents have made mistakes. This paper considers the role that consumers play in inducing efficient behavior by agents. I distinguish between two case: those where consumers have similar preferences to the principal, and those where consumer preferences diverge from those of the principal. In the former case, allowing consumer feedback improves allocations, and increasing consumer information is unambiguously beneficial.
Selection and Oversight in the Public Sector, With the Los Angeles Police Department as an Example
Date Posted: Jan 28, 2002
I offer theoretical and empirical observations on the oversight of public sector employees. I argue that it is unreasonable to expect that the solutions typically considered in the literature will be effective with public sector employees, because bureaucrats are especially difficult to monitor. To offset this weakness, agencies tend to hire bureaucrats who are biased against consumers, where such bias increases incentives. I then address how bureaucrats should be overseen and offer a choice bet
Favoritism Under Social Pressure
Date Posted: Sep 25, 2001
This paper provides empirical evidence of favoritism by agents, where that favoritism is generated by social pressure. To do so, we explore the behavior of professional soccer referees. Referees have discretion over the addition of extra time at the end of a soccer game (called injury time), to compensate for lost time due to unusual stoppages. We test for systematic bias shown by Spanish referees in favor of home teams. We show that referees systematically favor home teams by shortening clos
Favoritism Under Social Pressure
Date Posted: Sep 18, 2001
This paper provides empirical evidence of favoritism by agents, where that favoritism is generated by social pressure. To do so, we explore the behavior of professional soccer referees. Referees have discretion over the addition of extra time at the end of a soccer game (called injury time), to compensate for lost time due to unusual stoppages. We test for systematic bias shown by Spanish referees in favor of home teams. We show that referees systematically favor home teams by shortening close g
The Tenuous Tradeoff Between Risk and Incentives
Date Posted: Jun 25, 2001
Empirical work testing for a negative tradeoff between risk and incentives, a cornerstone of agency theory, has not had much success. Indeed, the data seem to suggest a positive relationship between measures of uncertainty and incentives, rather than the posited negative tradeoff. I argue that the existing literature fails to account for an important effect of uncertainty on incentives through the allocation of responsibility to employees. When workers operate in certain settings, the activi
Non-Monetary Exchange Within Firms and Industry
Date Posted: May 12, 2000
This paper considers why non-monetary means of exchange, such as barter and the reciprocation of favors, are chosen by firms despite the usual benefits of monetary transactions. We consider the chosen means of exchange when both monetary and non-monetary exchange mechanisms are available. We illustrate three potential reasons for the emergence of non-monetary trade. First, a willingness to barter may reveal information that cannot be revealed solely through monetary trade. Second, non-moneta
What Happens Within Firms? A Survey of Empirical Evidence on Compensation Policies
Date Posted: May 09, 2000
This paper provides an overview of empirical work dealing with the compensation policies of firms. This literature is considered from the perspective of three major theories: human capital, learning, and incentives. Considerable empirical work has addressed each of these theories with some success. However, our understanding of the effect of compensation on behavior and of the motivations for firms in choosing certain policies has been constrained by two important problems. First, the absence
Favoritism in Organizations
Date Posted: Apr 13, 1998
Objective measures of employee performance are rarely available. Instead, firms rely on subjective judgments by supervisors. Subjectivity opens the door to favoritism, where evaluators act on personal preferences toward subordinates to favor some employees over others. Firms must balance the costs of favoritism arbitrary rewards and less productive job assignments against supervisors' demands for authority over subordinates. We analyze the conditions under which favoritism is costly to organizat
Impetuous Youngsters and Jaded Old-Timers: Acquiring a Reputation for Learning
Date Posted: Feb 01, 1998
This paper examines individual decision making when decisions reflect on people's ability to learn. We address this problem in the context of a manager making investment decisions on a project over time. We show that in an effort to appear as a fast learner, the manager will exaggerate his own information; but ultimately, he becomes too conservative, being unwilling to change his investments on the basis of new information. Our results arise purely from learning about competence rather than conc