I NCENTIVES ARE the essence of economics. Despite many wide-ranging claims about their supposed importance, there has been little empirical assessment of incentive provision for workers. The purpose of this paper is to critically overview existing work on the provision of incentives. Since the interests of workers and their employers are not always aligned, a large theoretical literature has emphasized how firms design compensation contracts to induce employees to operate in the firm's interest. This literature has reached into many areas of compensation and has pointed to a multitude of different mechanisms that can be used to induce workers to act in the interests of their employers. These include piece rates, options, discretionary bonuses, promotions, profit sharing, efficiency wages, deferred compensation, and so on. My objective here is to evaluate this literature in the light of a growing empirical literature on compensation. Where possible, I will address the literature from two perspectives. First, an underlying assumption of this literature is that individuals respond to contracts that reward performance. Accordingly, I consider whether agents behave in this way, and whether these responses are always in the firm's interest. Second, I address whether firms write contracts with these responses in mind. In other words, do contracts look like the predictions of the theory? Incentives are provided to workers

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The Provision of Incentives in Firms

This study surveys the literature examining the privatization of state-owned enterprises (SOEs) We review the history of privatization, the theoretical and empirical evidence on the relative performance of state owned and privately owned firms, the types of privatization, if and by how much privatization has improved the performance of former SOEs in non-transition and transition countries, how investors in privatizations have fared, and the impact of privatization on the development of capital markets and corporate governance. In most settings privatization "works" in that the firms become more efficient, more profitable, and financially healthier, and reward investors.

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From State to Market: A Survey of Empirical Studies on Privatization

Political turnover and economic performance: the incentive role of personnel control in China

China's economic reforms have resulted in spectacular growth and poverty reduction. However, China's institutions look ill-suited to achieve such a result, and they indeed suffer from serious shortcomings. To solve the "China puzzle," this paper analyzes China's institution—a regionally decentralized authoritarian system. The central government has control over personnel, whereas subnational governments run the bulk of the economy; and they initiate, negotiate, implement, divert, and resist reforms, policies, rules, and laws. China's reform trajectories have been shaped by regional decentralization. Spectacular performance on the one hand and grave problems on the other hand are all determined by this governance structure. ( JEL O17, O18, O43, P21, P25, P26)

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The Fundamental Institutions of China's Reforms and Development

Instead of traditional principal–agent conflicts espoused in most research dealing with developed economies, principal–principal conflicts have been identified as a major concern of corporate governance in emerging economies. Principal–principal conflicts between controlling shareholders and minority shareholders result from concentrated ownership, extensive family ownership and control, business group structures, and weak legal protection of minority shareholders. Such principal–principal conflicts alter the dynamics of the corporate governance process and, in turn, require remedies different from those that deal with principal–agent conflicts. This article reviews and synthesizes recent research from strategy, finance, and economics on principal–principal conflicts with an emphasis on their institutional antecedents and organizational consequences. The resulting integration provides a foundation upon which future research can continue to build.

Corporate governance in emerging economies: A review of the principal-principal perspective: Review paper

Surveys are frequently used by businesses and governments to elicit information about the public’s preferences. They have become the most common way to gather preference information regarding goods, that are not (or are not yet) bought or sold in markets. In this paper we apply the standard neoclassical economic framework to generate predictions about how rational agents would answer such survey questions, which in turn implies how such survey data should be interpreted. In some situations, the standard economic model would be expected to have no predictive power. For situations where it does have predictive power, we compare different survey formats with respect to: (a) the information that the question itself reveals to the respondent, (b) the strategic incentives the respondent faces in answering the question, and (c) the information revealed by the respondent’s answer.

/pdf/incentive-and-informational-properties-of-preference-12z61l9ef6.pdf

Incentive and informational properties of preference questions

When the responsibility for output decisions was shifted from the state to the firm, and when firms were allowed to retain more of their profits, managers of Chinese state-owned enterprises strengthened workers' incentives. The managers paid more in bonuses and hired more workers on fixed-term contracts. The new incentives were effective: productivity increased with increases in bonus payments and in contract workers. The increase in autonomy raised workers' incomes (but not managers' incomes) and investment in the enterprise, but tended not to raise remittances to the state.

Autonomy and Incentives in Chinese State Enterprises

Recent reforms of Chinese state-owned enterprises strengthened a nascent managerial labor market by incorporating incentives suggestive of competitive Western labor markets. Poorly performing firms were more likely to have a new manager selected by auction, to be required to post a higher security deposit, and to be subject to more frequent review of the manager's contract. Managers could, be, and were, fired for poor performance. Managerial pay was linked to the firm's sales and profits, and reform strengthened the profit link and weakened the sales link. Thus the economic reforms helped develop an improved system of managerial resource allocation responsive to market forces.

https://www.jstor.org/stable/pdfplus/2138585.pdf

China's Evolving Managerial Labor Market

This paper examines the problems of coordinating and controlling divisions of a large firm. Divisions are typically interdependent and the corporate headquarters plays an important role in coordinating such decisions as pricing, allocation of funds to the divisions, and determining the level of corporate-wide research and development. One important problem is how to provide division managers with incentives both to act in congruence with the goals of the overall firm and to transmit accurate information to the corporate center so that the center's decisions may be enhanced.

The analysis proceeds by assuming that each division manager possess perfect knowledge of his own division's technology and the market conditions it faces. Each division's profits, however, depend upon certain coordinating decisions taken by the center. The center is assumed to be at least partially ignorant about the operations of the divisions and to rely upon information from the divisions in making coordinating decisions.

A control structure for a divisionalized firm is defined to be a set of rules for evaluating division managers and a decision-rule for central coordinating decisions. Division managers are assumed to act to maximize their evaluation measures so that managerial shirking is not considered. In this setting where perfect information is available, problems of risk aversion and risk sharing do not arise, and a minimum test for optimality of a control structure is given. Specifically, when each division manager seeks to maximize his own evaluation measure and when the center uses its decision-rule for coordination, overall firm profits should be maximized.

A control structure is proposed in which the center acts as if it is receiving “truthful” information from the division managers. This naive decision rule is justified by the accompanying evaluation measures that provide division managers with incentives to communicate in an honest manner. With the proposed evaluation measures, each division manager is rewarded on the basis of his division's contribution to overall profits. If the division's message to the center has no impact on the center's coordinating decisions, then the manager is evaluated on the basis of his own division's realized profits. If the division's message changes the coordinating decision, then the manager is evaluated on the basis of his division's realized profits less the reported impact of the change in coordinating decisions resulting from his message on the profits of the other divisions. It is shown that with this evaluation measure, a division manager is best off communicating truthfully, regardless of the messages of all others. The proposed control structure, therefore, provides an alternative to traditional profit-sharing. An application of the control structure to a resource allocation problem is also given.

Theodore Groves

Papers

Incentive and informational properties of preference questions

Autonomy and Incentives in Chinese State Enterprises

China's Evolving Managerial Labor Market

Incentives in a Divisionalized Firm

Efficient Collective Choice when Compensation is Possible