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


  • Garvey, Gerald T
  • Swan, Peter L


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.

Suggested Citation

  • Garvey, Gerald T & Swan, Peter L, 1992. "Managerial Objectives, Capital Structure, and the Provision of Worker Incentives," Journal of Labor Economics, University of Chicago Press, vol. 10(4), pages 357-379, October.
  • Handle: RePEc:ucp:jlabec:v:10:y:1992:i:4:p:357-79

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    References listed on IDEAS

    1. Kotlikoff, Laurence J. & Smith, Daniel E., 1984. "Pensions in the American Economy," National Bureau of Economic Research Books, University of Chicago Press, edition 0, number 9780226451466.
    2. B. Douglas Bernheim, 1987. "Social Security Benefits: An Empirical Study of Expectations and Realizations," NBER Working Papers 2257, National Bureau of Economic Research, Inc.
    3. Kathryn H. Anderson & Richard V. Burkhauser & Joseph F. Quinn, 1986. "Do Retirement Dreams Come True? The Effect of Unanticipated Events on Retirement Plans," ILR Review, Cornell University, ILR School, vol. 39(4), pages 518-526, July.
    4. Boskin, Michael J, 1977. "Social Security and Retirement Decisions," Economic Inquiry, Western Economic Association International, vol. 15(1), pages 1-25, January.
    5. Michael D. Hurd & Michael J. Boskin, 1984. "The Effect of Social Security on Retirement in the Early 1970s," The Quarterly Journal of Economics, Oxford University Press, vol. 99(4), pages 767-790.
    6. Kahn, James A., 1988. "Social security, liquidity, and early retirement," Journal of Public Economics, Elsevier, vol. 35(1), pages 97-117, February.
    7. Anthony J. Pellechio, 1981. "Social Security and the Decision to Retire," NBER Working Papers 0734, National Bureau of Economic Research, Inc.
    8. Hanoch, Giora & Honig, Marjorie, 1978. "The labor supply curve under income maintenance programs," Journal of Public Economics, Elsevier, vol. 9(1), pages 1-16, February.
    9. Pellechio, Anthony J, 1979. "Social Security Financing and Retirement Behavior," American Economic Review, American Economic Association, vol. 69(2), pages 284-287, May.
    10. Alan S. Blinder & Roger H. Gordon & Donald E. Wise, 1980. "Reconsidering the Work Disincentive Effects of Social Security," NBER Working Papers 0562, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Dragon, Robert & Garvey, Gerald T. & Turnbull, Geoffrey K., 1996. "A collective tournament," Economics Letters, Elsevier, vol. 50(2), pages 223-227, February.
    2. David N. Laband & Robert D. Tollison, 2000. "Intellectual Collaboration," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 632-661, June.
    3. Kräkel, Matthias & Nieken, Petra, 2015. "Relative performance pay in the shadow of crisis," European Economic Review, Elsevier, vol. 74(C), pages 244-268.
    4. 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.
    5. Danilov, Anastasia & Harbring, Christine & Irlenbusch, Bernd, 2014. "Helping in Teams," IZA Discussion Papers 8707, Institute for the Study of Labor (IZA).
    6. Robert Drago & Gerald T. Garvey, 1994. "Incentives for Helping on the Job: Theory and Evidence," Labor and Demography 9402002, EconWPA, revised 29 Mar 1994.
    7. 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.
    8. 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.
    9. Waldman, Michael, 2013. "Classic promotion tournaments versus market-based tournaments," International Journal of Industrial Organization, Elsevier, vol. 31(3), pages 198-210.
    10. repec:eee:labchp:v:3:y:1999:i:pb:p:2373-2437 is not listed on IDEAS
    11. 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.
    12. Jay Stewart, 1999. "Adverse Selection and Pay Compression," Southern Economic Journal, Southern Economic Association, vol. 65(4), pages 885-899, April.
    13. 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.

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