Trond E. Olsen

Bio: Trond E. Olsen is an academic researcher from Norwegian School of Economics. The author has contributed to research in topics: Incentive & Tax competition. The author has an hindex of 22, co-authored 82 publications receiving 1304 citations. Previous affiliations of Trond E. Olsen include Center for Economic Studies & University of Bergen.

The Rise of Individual Performance Pay

Abstract: Why does individual performance pay seem to prevail in humancapital-intensive industries where teamwork is so common? We present a model that aims to explain this. In a repeated game model of relational contracting, we analyze the conditions for implementing peerdependent incentive regimes when agents possess indispensable human capital. We show that the larger the share of values that the agents can hold-up, the lower is the implementable degree of peer-dependent incentives. In a setting with team effects - complementary tasks and peer pressure, respectively - we show that while group-based incentives are optimal if agents are dispensable, it may be costly, and in fact suboptimal, to provide team incentives once the agents become indispensable.

Team Incentives in Relational Employment Contracts

Abstract: The article analyzes conditions for implementing incentive schemes based on, respectively, joint, relative, and independent performance in a relational contract between a principal and a team of two interacting agents. A main result is that the optimal incentive regime depends crucially on the productivity of the agents. This occurs because agents’ productivities affect the principal’s temptation to renege on the relational contract. The analysis suggests that we will see a higher frequency of relative performance evaluation—and schemes that lie close to independent performance evaluation—as we move from low‐productive to high‐productive environments.

Endogenous Verifiability and Relational Contracting

Abstract: For contracting parties it will often be uncertain whether a legal court is able to enforce the real intents of their contract. The strict requirements of verifiability make it costly, if not impos sible, for parties to arrange their transactions and design their contract in a way that makes it completely protected by the court. A way out is then to rely on self-enforcing relational con tracts. Through repeated transactions the parties can make it costly for each other to breach the contract, by letting breach ruin future trade. But the self-enforcing range of contracts is limited, so the court's ability to enforce a contract is not without consequence for the contracting parties. If possible, the parties may thus have incentives to take costly actions that affect the ability of the court. Both ex ante preparations in terms of detailed contracting and ex post revelation of informa tion can increase the probability of fair court enforcement. In this paper we focus on the former, assuming that the parties are able to improve the verifiability of the contracted actions by care ful ex ante contract specifications. We assume that careful contracting can improve the court's ability to verify whether an action conforms to the one described in the contract. Then we ask: what happens to the self-enforcing contract equilibrium if a party takes actions ex ante that affect the probability of verification? In order to provide some answers, we analyze a simple repeated principal-agent game where the verifiability of the agent's actions is endogenously determined by the principal's investments in drafting an explicit contract pertaining to the quality of the agent's output. The model makes it possible to identify some subtle effects of two key enforcement devices: legal courts and repeated interaction. Note that by endogenizing verifiability we also endog enize the degree of contractual incompleteness. And the equilibrium level of incompleteness will depend on the "verification technology," i.e., the resource costs that are necessary to achieve various verifiability levels. This "verification technology" will be influenced in an essential way by the quality of courts. In fact, we can use the model to study relationships between two distinct aspects of courts, namely, their ability (which influences the verification technology) and their predictability (which manifests itself in the equilibrium level of verifiability, i.e., the probability with which the court in fact will verify the relevant action). The repeated game approach formalizes an economic concept of trust and trustworthiness since a party honors trust if the present value of honoring exceeds the present value of abusing it. The discount factor is then a proxy for the trust level in the relationship. By studying the effect of variations in verification technology and the discount factor, we can gain insight into the rela tionship between court ability, explicit contracting, trust and relational contracting. Below we summarize the results.

Collusion and renegotiation in hierarchies: a case of beneficial corruption*

Abstract: Corruption opportunities arise when a principal delegates enforcement or audit authority to a supervisor. The supervisor may then strike a deal with the agent she is supposed to monitor and conceal important information from the principal. Corruption imposes a constraint on governance and appears therefore to be harmful for the principal. We show that this need not be the case. In our model, the prospect of corruption can make the principal better off. The reason is that the collusion possibility generates dynamic effects which, in cases where only limited intertemporal commitments can be made, may be beneficial for the principal.

Gender Differences in Preferences

Abstract: This paper reviews the literature on gender differences in economic experiments. In the three main sections, we identify robust differences in risk preferences, social (other-regarding) preferences, and competitive preferences. We also speculate on the source of these differences, as well as on their implications. Our hope is that this article will serve as a resource for those seeking to understand gender differences and to use as a starting point to illuminate the debate on gender-specific outcomes in the labor and goods markets.

Sources, Procedures, and Microeconomic Effects of Innovation

Abstract: Fabio Arcangeli, Paul David, Frank Engelman, Christopher Freeman, Massimo Moggi, Richard Nelson, Luigi Orsenigo, Nathan Rosenberg, Michele Salvati, G. N. von Tunzelman, two anonymous referees, and the participants at the meeting of the Committee on Distribution, Growth, and Technical Progress of the Italian National Research Council (CNR), Rome, November 16, 1985, have helped with various redraftings. A particularly grateful acknowledgment is for the insightful and patient help of Moses Abramovitz. This work has been undertaken at the Science Policy Research Unit (SPRU), University of Sussex, as part of the research program of the Designated Research Centre, sponsored by the Economic and Social Research Council (ESRC). Earlier support to the research that led to this paper by the Italian National Research Council (CNR) is also gratefully acknowledged. The statistical research has been undertaken with the assistance of Stephano Brioschi, Ilaria Fornari, and Giovannu Prennushi.

The Economic Institutions of Capitalism

Abstract: The 2008 crash has left all the established economic doctrines - equilibrium models, real business cycles, disequilibria models - in disarray. Part of the problem is due to Smith’s "veil of ignorance": individuals unknowingly pursue society’s interest and, as a result, have no clue as to the macroeconomic effects of their actions: witness the Keynes and Leontief multipliers, the concept of value added, fiat money, Engel’s law and technical progress, to name but a few of the macrofoundations of microeconomics. A good viewpoint to take bearings anew lies in comparing the post-Great Depression institutions with those emerging from Thatcher and Reagan’s economic policies: deregulation, exogenous vs. endoge- nous money, shadow banking vs. Volcker’s Rule. Very simply, the banks, whose lending determined deposits after Roosevelt, and were a public service became private enterprises whose deposits determine lending. These underlay the great moderation preceding 2006, and the subsequent crash.

Public policies against global warming: a supply side approach

Abstract: The countries that have ratified the Kyoto Protocol have pledged to limit global warming by reducing the demand for fossil fuels. But what about supply? If suppliers do not react, demand reductions by a subset of countries are ineffective. They simply depress the world price of carbon and induce the environmental sinners to consume what the Kyoto countries have economized on. Even worse, if suppliers feel threatened by a gradual greening of economic policies in the Kyoto countries that would damage their future prices; they will extract their stocks more rapidly, thus accelerating global warming. The paper discusses the remaining policy options against global warming from an intertemporal supply-side perspective.