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Incentives, Team Production, Transaction Costs and the Optimal Contract: Estimates of an Agency Model using Payroll Records

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  • Christopher Ferrall
  • Bruce Shearer

Abstract

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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Suggested Citation

  • Christopher Ferrall & Bruce Shearer, 1994. "Incentives, Team Production, Transaction Costs and the Optimal Contract: Estimates of an Agency Model using Payroll Records," CIRANO Working Papers 94s-12, CIRANO.
  • Handle: RePEc:cir:cirwor:94s-12
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    File URL: https://cirano.qc.ca/files/publications/94s-12.pdf
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    Cited by:

    1. Paarsch, Harry J & Shearer, Bruce, 2000. "Piece Rates, Fixed Wages, and Incentive Effects: Statistical Evidence from Payroll Records," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(1), pages 59-92, February.

    More about this item

    Keywords

    Principal agent models; Transactions costs; Performance pay; Maximum likelihood estimation; Modèle de principal agent ; Coûts transactionnels ; Système de prime ; Méthode du maximum de vraisemblance;
    All these keywords.

    JEL classification:

    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • D2 - Microeconomics - - Production and Organizations
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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