Organizational Design: Decision Rights and Incentive Contracts

Organizational Design : Decision Rights and Incentive Contracts

Meckling (1992) argue that moving a decision away from the inherently best-informed party involves costs in communication and garbling but may lodge it with someone who has better incentives to make good decisions. But generally we expect that incentives are part of the organizational design. Why not just provide incentives to those with the best information so that they make the right decision...

Incentive contracts and unemployment

We study a labour market in which ...rms can observe workers’ output but not their e¤ort, and in which a worker’s productivity in a given ...rm depends on a worker-...rm speci...c component, unobservable for the ...rm. Firms o¤er wage contracts that optimally trade o¤ effort and wage costs. As a result, employed workers enjoy rents, which in turn create unemployment. We show that the incentive ...

”Yes Men,” Integrity, and the Optimal Design of Incentive Contracts

In a pioneering approach towards the explanation of the phenomenon of “yes man” behavior in organizations, Prendergast (1993) argued that incentive contracts in employment relationships generally make a worker distort his privately acquired information. This would imply that there is a trade-off between inducing a worker to exert costly effort and inducing him to tell the truth. In contrast, we...

Efficient Incentive Contracts

A so-called "incentive contract" is a linear payment schedule, where the buyer pays a fixed fee plus some proportion of audited project cost. That remaining proportion of project cost borne by the seller is called the "sharing ratio." A higher sharing ratio creates more incentive to reduce costs. But it also makes the agent bear more cost uncertainty, requiring as compensation a greater fixed f...

Incentive Contracts and Performance Measurement