Wendelin Schnedler

Likelihood Estimation for Censored Random Vectors

ABSTRACT This article shows how to construct a likelihood for a general class of censoring problems. This likelihood is proven to be valid, i.e. its maximizer is consistent and the respective root-n estimator is asymptotically efficient and normally distributed under regularity conditions. The method generalizes ordinary maximum likelihood estimation as well as several standard estimators for censoring problems (e.g. tobit type I–tobit type V).

When Is It Foolish to Reward for A While Benefiting from B

A performance measure may or may not reflect the relative importance of different tasks for the production of benefit: it can be aligned or unaligned. Here, I examine when using an aligned measure generates a larger surplus in a principal‐agent relationship than using an unaligned but otherwise identical measure. I find that (i) the agent’s effort costs matter for the optimal way of measuring performance, and (ii) the optimal measure is not aligned but tilted toward tasks that the agent finds easy. Failing to recognize these insights may lead to false predictions about the use of incentives.

Too Few Cooks Spoil the Broth: Division of Labor and Directed Production

Abstract How can a manager influence workers activity, while knowing little about it? This paper examines a situation where production requires several tasks, and the manager wants to direct production to achieve a preferred allocation of effort across tasks. However, the effort that is required for each task cannot be observed, and the production result is the only indicator of worker activity. This paper illustrates that in this situation, the manager cannot implement the preferred allocation with a single worker. On the other hand, the manager is able to implement the preferred allocation by inducing a game among several workers. Gains to workers from collusion may be eliminated by an ability-dependent, but potentially inefficient, task assignment. These findings provide a new explanation for the division of labor, and bureaucratic features such as ``over-specialization and ``wrong task allocation.

You Don't Always Get What You Pay For: Bonuses, Perceived Income and Effort

Abstract Consider a principal-agent relationship in which more effort by the agent raises the likelihood of success. This paper provides conditions such that no success bonus induces the agent to exert more effort and the optimal contract is independent of success. Moreover, success bonuses may even reduce effort and thus the probability of success. The reason is that bonuses increase the perceived income of the agent and can hence reduce his willingness to exert effort. This perceived income effect has to be weighed against the incentive effect of the bonus. The tradeoff is determined by the marginal effect of effort on the success probability in relation to this probability itself (success hazard-rate of effort). The paper also discusses practical implications of the finding.

Effort Misallocation and the Value of Signals

What is the relationship between effort misallocation and the value of signals in hidden action models? In this class of models, relevant actions cannot be contractually fixed. The inability of one party to commit to the efficient action entails an efficiency loss. In other words, there are costs of non-contractibility. Signals may help to reduce the costs of non-contractibility: By conditioning payments on signals, otherwise not contractible actions can be induced.

Firm Performance Measures

This chapter deals with incentive schemes which are based on firm performance measures. It addresses the question whether it makes sense to pay workers according to firm’s performance. The answer will rest on a trade-off between misallocation and uncertainty. It is argued that firm performance measures reduce misallocation and associated costs while increasing uncertainty and thus entailing higher uncertainty compensation. Additionally, it is considered that firm performance measures are unattractive because they provoke free-riding. However, within hiddenaction models free-riding does generally not occur. The related literature is reviewed in Section 3.1. Because the benefit usually occurs at the firm level, firm performance measures are closely related to benefit signals. Section 3.2 presents a model describing the vice and virtue of benefit signals and contrasts it with an alternative that features a trade-off between misallocation and uncertainty compensation. Finally, Section 3.3 explains why firm performance measures resemble benefit signals in the sense that they tend to reduce misallocation and increase uncertainty of the worker’s income. This leads to the hypothesis that firm performance measures are more intensely employed if misallocation entails high costs. Then, empirical ways to test this hypothesis are discussed and Section 3.4 summarises the main ideas of this chapter.

Statistical Model and Empirical Evidence

Building on the theoretical insights of the second chapter and their application to firm performance measures in the third chapter, this chapter examines the empirical evidence for the hypothesis that the value of firm performance measures results from the reduction of misallocation costs. Empirically, firm performance pay should be high whenever task descriptors indicate high distortion costs.