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Managerial Objectives, Capital Structure, and the Provision of Worker Incentives

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  • Garvey, Gerald T
  • Swan, Peter L

Abstract

Worker incentive schemes are invariably assumed to be administered by an owner-entrepreneur who has an incentive to understate worker performance after the event. While tournaments can overcome this problem, they discourage cooperation between workers. The authors show that a professional manager concerned with equality between workers and with avoiding bankruptcy rather than maximizing shareholder wealth will conduct a tournament that preserves individual effort incentives while promoting cooperation between workers. The theory predicts lower debt levels and more compressed pay scales as cooperation becomes more important. In the limit, this becomes a group bonus scheme supported by "blue-chip" debt. Copyright 1992 by University of Chicago Press.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Labor Economics.

Volume (Year): 10 (1992)
Issue (Month): 4 (October)
Pages: 357-79

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Handle: RePEc:ucp:jlabec:v:10:y:1992:i:4:p:357-79

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Web page: http://www.journals.uchicago.edu/JOLE/

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Cited by:
  1. Karotkin, Drora & Paroush, Jacob, 1995. "Incentive schemes for investment in human capital by members of a team of decision makers," Labour Economics, Elsevier, vol. 2(1), pages 41-51, March.
  2. Robert Drago & Gerald T. Garvey, 1994. "Incentives for Helping on the Job: Theory and Evidence," Labor and Demography 9402002, EconWPA, revised 29 Mar 1994.
  3. Baik, Kyung Hwan, 1998. "Difference-form contest success functions and effort levels in contests," European Journal of Political Economy, Elsevier, vol. 14(4), pages 685-701, November.
  4. DeVaro, Jed, 2011. "Using "opposing responses" and relative performance to distinguish empirically among alternative models of promotions," MPRA Paper 35175, University Library of Munich, Germany.
  5. Gaston, Noel, 1997. "Efficiency wages, managerial discretion, and the fear of bankruptcy," Journal of Economic Behavior & Organization, Elsevier, vol. 33(1), pages 41-59, May.
  6. Dragon, Robert & Garvey, Gerald T. & Turnbull, Geoffrey K., 1996. "A collective tournament," Economics Letters, Elsevier, vol. 50(2), pages 223-227, February.
  7. Ugarte, Armando & Oren, Shmuel, 2000. "Coordination of internal supply chains in vertically integrated high-tech manufacturing organizations (HTMOs)," International Journal of Production Economics, Elsevier, vol. 67(3), pages 235-252, October.
  8. Waldman, Michael, 2013. "Classic promotion tournaments versus market-based tournaments," International Journal of Industrial Organization, Elsevier, vol. 31(3), pages 198-210.

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