We apply agency theory to the payroll records of a copper mine that paid a production bonus to teams of workers. As with most incentive pay used by firms, the bonus was simpler in form than the optimal contract that balances incentives, insurance, and free-riding. We explore whether transactions costs help explain this discrepancy. We estimate an agency model for the payroll data using the method of maximum likelihood and find that incentives and free-riding within teams accounted for two-thirds of the bonus system's inefficiency relative to potential full information profits. The remaining one-third of the inefficiency is attributed to the form of the incentive contract as constrained by transactions costs. We discuss alternative explanations and the general empirical content of agency theory.
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Paper provided by Queen's University, Department of Economics in its series Working Papers with number
908.
Find related papers by JEL classification: L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior D2 - Microeconomics - - Production and Organizations J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
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