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Incentives and Transactions Costs within the Firm: Estimating an Agency Model Using Payroll Records

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Author Info
Ferrall, Christopher
Shearer, Bruce

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Abstract

The authors estimate an agency model using the payroll records of a copper mine that paid a production bonus to teams of workers. They estimate the cost of incomplete information due to insurance and incentives considerations and the inefficiency caused by the simple form of the incentive contract itself. At the estimated parameters, the cost of worker risk aversion (insurance) is of similar magnitude to moral hazard (incentives). Overall, incomplete information accounted for one-half of the bonus system's inefficiency relative to potential full information profits. The other half is attributed to the bonus system's inefficient generation of incentives and insurance relative to the optimal incentive contract. Copyright 1999 by The Review of Economic Studies Limited.

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Publisher Info
Article provided by Blackwell Publishing in its journal Review of Economic Studies.

Volume (Year): 66 (1999)
Issue (Month): 2 (April)
Pages: 309-38
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Handle: RePEc:bla:restud:v:66:y:1999:i:2:p:309-38

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  2. Hueth, Brent & Ligon, Ethan, 2001. "Estimation Of An Optimal Tomato Contract," 2001 Annual meeting, August 5-8, Chicago, IL 20560, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  3. Adam Copeland & Cyril Monnet, 2003. "The welfare effects of incentive schemes," Finance and Economics Discussion Series 2003-08, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  4. Anders Frederiksen & Elöd Takáts, 2006. "Layoffs as Part of an Optimal Incentive Mix: Theory and Evidence," IZA Discussion Papers 2447, Institute for the Study of Labor (IZA). [Downloadable!]
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  5. Martin Gaynor & James B. Rebitzer & Lowell J. Taylor, 2001. "Incentives In HMOs," Economics Working Paper Archive 340, Levy Economics Institute, The. [Downloadable!]
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  6. Harry J. Paarsch & Bruce S. Shearer, 1997. "On the Elasticity of Effort for Piece Rates: Evidence from the British Columbia Tree-Planting Industry," CIRANO Working Papers 97s-31, CIRANO. [Downloadable!]
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  7. Bernd Theilen, 2008. "Market Competition and Lower Tier Incentives," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  8. Wendelin Schnedler, 2005. "Likelihood Estimation for Censored Random Vectors," Working Papers 0417, University of Heidelberg, Department of Economics, revised Feb 2005. [Downloadable!]
  9. Brown, Zachary S. & Bellemare, Marc F., 2009. "The Structural Estimation of Principal-Agent Models by Least Squares: Evidence from Land Tenancy in Madagascar," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49368, Agricultural and Applied Economics Association. [Downloadable!]
  10. Chiappori, Pierre Andre & Salanie, Bernard, 2002. "Testing Contract Theory: A Survey of Some Recent Work," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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