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Incentives, Team Production, Transaction Costs, And The Optimal Contract: Estimates Of An Agency Model Using Payroll Records

Author

Listed:
  • 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.

Suggested Citation

  • Christopher Ferrall & Bruce Shearer, 1994. "Incentives, Team Production, Transaction Costs, And The Optimal Contract: Estimates Of An Agency Model Using Payroll Records," Working Paper 908, Economics Department, Queen's University.
  • Handle: RePEc:qed:wpaper:908
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    File URL: https://www.econ.queensu.ca/sites/econ.queensu.ca/files/qed_wp_908.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

    maximum likelihood estimation; principal-agent models; transactions costs; performance pay;
    All these keywords.

    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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