Incentive, status and thereafter: A critical survey

Dey, Oindrila and Banerjee, Swapnendu (2010): Incentive, status and thereafter: A critical survey.

Abstract

This paper aims to provide a survey on the studies on incentive, especially non-monetary incentive like status. We intend to summarize the different studies in a concise manner and comment on the divergent views on valuation for status, relation between monetary and status incentives, the technique of modeling status and on the cost of introducing status. We also underline the some probable adverse consequences associated with the use of status incentive. In this paper it also highlights the problem associated with asymmetric information in the labour market, specifically, the (post contractual) moral hazard problem.

• Item Type: MPRA Paper
• Language: English
• Keywords: Status, incentives, principal –agent problem, moral hazard
• Subjects: L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior

References

Adams, J.S. (1965): "Inequity in Social Exchange" in Advances in Social Psychology by L. Berkowitz, Vol. 2, Academic Press, New York.

Aggarwal, R. and A. Samwick (1997): “Executive Compensation, Strategic Competition, and Relative Performance Evaluation: Theory and Evidence,” Dartmouth College.

Agrawal, A. and G. Mandelker (1987): “Managerial Incentives and Corporate Investment and Financing Decisions,” Journal of Finance, Vol. 42, No. 4, pp 823-837.

Agrawal, A. and R. Walkling (1994): “Executive Careers and Compensation Surrounding Takeover Bids” Journal of Finance, Vol. 49, No. 3, pp 985-1014.

Akerlof, G. A. and J. L. Yellen (1990): “The Fair Wage-Effort Hypothesis and Unemployment,” Quarterly Journal of Economics, Vol. 105, No. 2, pp 255–283.

Akerlof, G. A. and R. E. Kranton (2000):“Economics and Identity,” Quarterly Journal of Economics, Vol. 105, No. 3, pp 715–753.

Akerlof, G.A. and R. E. Kranton (2005): “Identity and the Economics of Organizations,” Journal of Economic Perspectives, Vol.19, No.1, pp 9-32.

Alcázar, L., F.H. Rogers, N. Chaudhury, J.Hammer, M.Kremer, K. Muralidharan (2006): “Why are teachers absent? Probing service delivery in Peruvian primary schools”, International Journal of Educational Research, Vol. 45, No. 3, pp 117–136.

Al-Ubaydli, O., S.Andersen, U. Gneezy, and J. A. List (2008): “For love or money? Comparing the effects of non-pecuniary and pecuniary incentive schemes in the workplace.” University of Chicago unpublished manuscript.

Athey, S., J. Roberts (2001): “Organizational Design: Decision Rights and Incentive Contracts”, The American Economic Review, Vol.91, No. 2, pp 200-205.

Auriol, E. and R. Renault (2001): “ Incentive Hierarchies”, Annales d'Economie et de Statistique, Vol. 63-64, pp 261-282.

Auriol, E. and R. Renault (2008): “Status and Incentives”, The RAND Journal of Economics, Vol. 39, No. 1, pp 305-326.

Azmat, G. and N. Iriberri (2010): “The Importance of Relative Performance Feedback Information: Evidence from a Natural Experiment using High-school Students”, Journal of Public Economics, Vol. 94, No. 7, pp 435-452.

Baiman, S. and R. Verrecchia (1995): “Earnings and Price-Based Compensation Contracts in the Presence of Discretionary Trading and Incomplete Contracting,” Journal of Accounting and Economics, Vol. 20, No.1, pp 93-121.

Ball, S. and C. Eckel (1996): “Buying Status: Experimental Evidence on Status in Negotiation”, Psychology and Marketing, Vol. 13, pp. 381-405.

Ball, S. and C. Eckel (1998): “The Economic Value of Status”, Journal of Socio-Economics, Vol. 17, pp. 495-514.

Ball, S., C. Eckel, P.J. Grossman and W. Zame (2001): “Status in Markets” Quarterly Journal of Economics, Vol. 155, pp. 161-181.

Banerjee, S. and O. Dey, (2011): “Incentives ‘and’ Status”. SSRN working paper no.1968374.

Barnard, C. (1938): “The functions of the executive”, Cambridge/Mass, Harvard University Press.

Belliveau, M.A., O'Reilly, C.A. Ill, and J.B. Wade (1996): “Social Capital at the Top: The Effects of Social Similarity and Status on CEO Compensation”, Academy of Management Journal, Vol. 39, pp. 1568-1593.

Bénabou, R. and J.Tirole (2003): “Intrinsic and Extrinsic Motivation”, The Review of Economic Studies, Vol. 70, No. 3, pp 489-520.

Besley, T. and M. Ghatak (2008): “Status Incentives”, The American Economic Review, Vol.98, No. 2, pp 206-211.

Besley,T. and M. Ghatak (2005): “Competition and Incentives with Motivated Agents”, The American Economic Review, Vol.95, No., pp 616-636.

Bewley, T.F. (1999): “Why Wages Don’t Fall During a Recession”, Cambridge/Mass, Harvard University Press.

Bizjak, J., J. Brickley and J. Coles (1993), “Stock-Based Incentive Compensation and Investment Behavior,” Journal of Accounting and Economics, Vol. 16, No.1-2-3, pp 349-372.

Boeker, W. (1992): “Power and Managerial Dismissal: Scapegoating at the Top,” Administrative Science Quarterly, Vol.37, pp 400-421.

Brewer, M. (1999): “The Psychology of Prejudice: Ingroup Love and Outgroup Hate?,” Journal of Social Issues, Vol. 55, No.3,pp. 429-435.

Brown, Gordon D.A., J. Gardner, A. Oswald and J. Qian (2007): “Does Wage Rank Affect Employees Well-being?” Industrial Relations: A Journal of Economy and Society, Vol.47, No. 3, pp 355-389.

Bushman, R. and R. Indjejikian (1993): “Accounting Income, Stock Price, and Managerial Compensation,” Journal of Accounting and Economics, Vol.16, No.1-2-3, pp 3-23.

Campbell, T., Y. Chan, and A. Marino (1989): “Incentive contracts for Managers who Discover and Manage Investment Projects,” Journal of Economic Behavior and Organizations, Vol.12, pp 353-364.

Carroll, T. and D. Ciscel (1982): “The Effects of Regulation on Executive Compensation.”Review of Economics and Statistics, Vol.64, No.3, pp 505-509.

Charness, G. and P. Kuhn (2007): “Does pay inequality affect worker effort? Experimental evidence”, Journal of Labor Economics, Vol.25, No.4, pp. 693-723.

Clark, A., D. Masclet, and M. C. Villeval (2010): “Effort and Comparison Income: Experimental and Survey Evidence”Industrial and Labour Relations Review, Vol 63, No. 3, pp 407-470.

Clark, A.E. and A.J. Oswald (1996): “Satisfaction and Comparison Income”, Journal of Public Economics, Vol.61, No. 3, pp 359-381.

Clark, A.E., E. Andrew, P. Frijters and A.S. Michael (2008): “Relative Income, Happiness and Utility: An Explanation for the Easterlin Paradox and Other Puzzles”, Journal of Economic Literature, Vol. 46, No. 1, pp 95-144.

Clark, P.B. and J.Q. Wilson (1961): “Incentive Systems: A Theory of Organizations”, Administrative Science Quarterly, Vol. 6, No. 2, pp. 129-166.

Cole, H.L., Mailath, G.J., Postlewaite, A., 1992. “Social norms, savings behavior, and growth,” Journal of Political Economy, Vol.100, pp 1092-1125.

Cowherd, D. and D. Levine (1992): “Product Quality and Pay Equity Between Lower-Level Employees and Top Management: An Investigation of Distributive Justice Theory,” Administrative Science Quarterly, Vol.37, pp 302-320.

Dey, O. and S. Banerjee(2013): “Status, incentives and random favouritism”, MPRA working paper no. 49188, University Library of Munich, Germany.

Dey,O, and S. Banerjee (2014): ''Status Incentives with Discrete Effort: A Note'', Economics Bulletin, Vol. 34 No. 2 pp. 1205-1213.

Dhillon, A. and A. Herzog-Stein (2009): “Games of Status and Discriminatory Contracts”, Games and Economic Behaviour, Vol.65, pp 105-123.

Dubey, P. and J. Geanakoplos (2010) “Grading Exams: 100, 99, 98, … or A,B,C?” Games and Economic Behavior, Vol. 69, pp 72-94.

Duesenburry, J.S. (1949): “Income, Saving and the Theory of Consumer Behavior”, Harvard University Press, Cambridge.

Duflo, E. and E. Saez (2002): “Participation and Investment Decision in a Retirement Plan: The Influence of Colleagues' Choices,” Journal of Public Economics, Vol. 85, pp. 121-48.

Easterlin, R.A. (1974): “Does Economic Growth Improve the Human Lot? Some Empirical Evidence: Nations and Households in Economic Growth” in Essays in Honour of Moses Abramowitz, by P.A. David and M.W.Reder, Academic Press, New York and London.

Eckel C., E. Fatas, and R. Wilson (2009): “Status and Cooperation in Organizations,” University of Texas at Dallas and Rice University.

Eckel, C. and R. Wilson (2007), “Social Learning in Coordination Games: Does Status Matter?,” Experimental Economics, Vol.10, No.3, pp. 317-330.

Fama, E. (1980): “Agency Problems and the Theory of the Firm,” Journal of Political Economy, Vol. 88, No.2, pp 288-307.

Fehr, E. and A.Falk (2002):“Psychological foundations of incentives”, European Economic Review, Vol. 46, No. 4–5, pp 687-724.

Fehr, E. and K.M. Schmidt (1999): “A theory of fairness, Competition, and Cooperation”, The Quaterly Journal of Economics, Vol.114, No. 3, pp 817-868.

Fehr,E. and K.M. Schmidt (2003): “Theories of Fairness and Reciprocity”, Munich Discussion Paper 2001-02, Department of Economics, University of Munich.

Ferrer-i-Carbonell, A. (2005): “Income and Well-Being: An Empirical Analysis of the Comparison Income Effect,” Journal of Public Economics, Vol. 89, pp. 997-1019.

Fershtman, C, H. K. Hvide and Y. Weiss (2006): “Cultural Diversity, Status Concerns and the Organization of Work”, in Solomon W. Polachek, Carmel Chiswick, Hillel Rapoport (ed.) The Economics of Immigration and Social Diversity (Research in Labor Economics, Volume 24), Emerald Group Publishing Limited, pp 361-396

Festinger, L. (1954): “A theory of social comparison processes”, Human Relations, Vol.7, No. 2, pp 117-140.

Finkelstein, S. (1996): “Understanding Pay Dispersion within Top Management Teams: A Social Comparison Perspective,” Amos Tuck School of Business, Dartmouth College.

Fleissbach, K., B. Weber, P. Trautner, T. Dohmen, U. Sunde, C.E. Elger and A. Falk (2007): “Social comparison affects reward-related brain activity in the human ventral striatum”, Science, Vol. 318, No. 5854, pp 1305-1308.

Frank, R.H. (1985): “Choosing the Right Pond: Human Behavior and the Quest for Status”, Oxford University Press, New York.

Frank, R.H.(1984): “Interdependent preferences and Competitive Wage Structure”, The RAND Journal of Economics, Vol. 15, No. 4, pp 510-520.

Gächter, S. and Thoeni (2009): “Social Comparisons and Performance: Experimental Evidence on the Fair-Wage Effort Hypothesis.” CEDEX Discussion Paper 2209-23.

Garcia-Prado, A. (2005): “Sweetening the Carrot: Motivating public physicians for better performance”, Vol. 3772, World Bank Publications.

Glaeser, E., B. Sacerdote and J. Scheinkman (1996), “Crime and Social Interactions”, Quarterly Journal of Economics, Vol. 111, No.2, pp. 507-48.

Grossman, S. and O. Hart (1983), “An Analysis of the Principal-Agent Problem,” Econometrica, Vol.51, pp 7-45.

Güth, W., M. Königstein, J. Kovacs, and E. Zala-Mezo (2001): "Fairness within Firms: The Case of One Principal and Multiple Agents," Schmalenbach's Business Review, Vol. 53, pp. 82-101.

Hambrick, D. and A. Cannella (1993): “Relative Standing: A Framework for Understanding Departures of Acquired Executives,” Academy of Management Journal, Vol.36, No.4, pp 733-762.

Hambrick, D. and P. Siegel (1998): “Pay Dispersion within Top Management Groups: Evidence of its Harmful Effects on Performance of High-Technology Firms.” Columbia University.

Hart, O. and B. Holmstrom (1987): “The Theory of Contracts.” In T. Bewley (ed.), Advances in Economic Theory, Fifth World Congress. Cambridge: University Press.

Healy, P. (1985): “The Effect of Bonus Schemes on Accounting Decisions,” Journal of Accounting and Economics, Vol.7, pp 85-107.

Hirshleifer, D. and R. Suh (1992): “Risk, Managerial Effort, and Project Choice,” Journal of Financial Intermediation, Vol. 2, pp 308-345.

Holmstrom, B. (1979): “Moral Hazard and Observability,” The Bell Journal of Economics,Vol.10, pp 74-91.

Holmstrom, B. (1982): “Moral Hazard in Teams,” The Bell Journal of Economics, Vol. 13,No. 2, pp 324-340.

Holmstrom, B. (1992): “Contracts and the Market for Executives: Comment,” in Contract Economics, edited by Lars Wein and Hans Wijkander, Blackwell Publishers.

Holmstrom, B. and P. Milgrom (1987): “Aggregation and Linearity in the Provision of Intertemporal Incentives” Econometrica, Vol. 55, pp 303-328.

Holmstrom, B. and P. Milgrom (1991):“Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design.” Journal of Law, Economics, and Organization, Vol.7, pp 24-52.

Holthausen, R., D. Larcker and R. Sloan (1995): “Annual Bonus Schemes and the Manipulation of Earnings,” Journal of Accounting and Economics, Vol. 19, No.1, pp 29-74.

Holthausen, R., D. Larcker and R. Sloan (1995): “Business Unit Innovation and the Structure of Executive Compensation,” Journal of Accounting and Economics, Vol.19, No.2-3, pp 279-313.

Hopkins, E. and T. Kornienko (2004): “Running to Keep in the Same Place: Consumer Choice as a Game of Status”, American Economic Review, Vol. 94, No. 4, pp 1085-1107.

Hubbard, R. and D. Palia (1995): “Executive Pay and Performance: Evidence from the US Banking Industry,” Journal of Financial Economics, Vol. 39, No.1, pp 105-130.

Huberman, B.A., C. H. Loch, A. Önçüler (2004): “Status as a Valued Resource”, Social Psychology Quarterly, Vol. 67, No. 1, pp 103-114.

Innes, R.D. (1990): “Limited Liability and Incentive Contracting with Ex-Ante Action Choices’, Journal of Economic Theory, 52, 45-67.

Jemmott, B. and E.Gonzalez(1989): “Social Status, the Status Distribution and Performance in Small Groups.” Journal of Applied Social Psychology, Vol. 19 (1989), pp. 584-598.

John, T. and K. John (1993): “Top-Management Compensation and Capital Structure,” Journal of Finance, Vol. 48, No.3, pp 949-974.

Joskow, P., N. Rose and C. Wolfram (1996): “Political Constraints on Executive Compensation: Evidence from the Electric Utility Industry,” Rand Journal of Economics, Vol. 27, No. 1, pp 165-182.

Kandel, E. and E.P. Lazear (1992): “Peer Pressure and Partnerships,” The Journal of Political Economy, Vol. 100, No. 4, pp 801-817.

Kedia, S. (1997): “Strategic Interactions in Executive Compensation Contracts,” Harvard University.

Kumru, C. and L. Vesterlund (2008): “The Effects of Status on Voluntary Contribution,” Working Papers no. 266, University of Pittsburgh.

Lambert, R. (1986): “Executive Effort and the Selection of Risky Projects,” Rand Journal of Economics, Vol. 17, No.1, pp 77-88.

Lambert, R. and D. Larcker (1988): “An Analysis of the Use of Accounting and Market Measures of Performance in Executive Compensation Contracts,” Journal of Accounting Research, Vol. 25, pp 85-129.

Layard, R. (2011), “Happiness: Lessons from a New Science”, Penguin, London.

Lazear, E. and S. Rosen (1981): “Rank-Order Tournaments as Optimum Labor Contracts,” Journal of Political Economy, Vol. 89, No.5, pp 841-864.

Luttmer, E.F.P. (2005): “Neighbors as Negatives: Relative Earnings and Relative Earnings and Well-Being”, The Quarterly Journal of Economics, Vol. 120, No. 3, pp 963-1002.

McBride, M. (2001): “Relative-income effects on subjective well-being in the cross-section”, Journal of Economic Behavior and Organization Vol. 45, pp 251–278.

Mehran, H., G. Nogler, and K. Schwartz (1998): “CEO Incentive Plans and Corporate Liquidation Policy” Journal of Financial Economics, Vol. 50, No. 3, pp 319–349.

Mirrlees, J. (1976): “The Optimal Structure of Incentives and Authority within an Organization,” Bell Journal of Economics, Vol.7, pp 105-131.

Moldovanu, B., A. Sela and X.Shi (2007): “Contests for Status”, Journal of Political Economy, Vol.115, No. 2, pp 338-363.

Mookherjee, D. (1984):“Optimal Incentive Schemes with Many Agents,” Review of Economic Studies, Vol. 51, No.3, pp 433-446.

Nelson, B (1994) “1001 Ways to Reward Employees.”Workman Publishing.

O’Reilly, C., B. Main and G. Crystal (1988): “CEO Compensation as Tournament and Social Comparison: A Tale of Two Theories,” Administrative Science Quarterly, Vol. 33, pp 257-274.

O’Reilly, C., J. Wade, and T. Pollock (1998): “Overpaid CEOs and Underpaid Managers:Equity and Executive Compensation.” Stanford University.

Perrot, S. (1999): “Statut Social et Incitation au Travail.” Mimeo, Universit? des Sciences Sociales de Toulouse.

Pfeffer, J. (1994): “Competitive Advantage through People: Unleashing the Power of the Work Force”, Harvard Business School Press.

Postlewaite, A. (1998): “The Social Basis of Interdependent Preferences”, European Economic Review, Vol. 42, pp 779-800.

Pourciau, S. (1993): “Earnings Management and Nonroutine Executive Changes,” Journal of Accounting and Economics, Vol.16, No.1-2-3, pp 317-36.

Prendergast, C. (1999): “The Provision of Incentives in Firms,” Journal of Economic Literature, Vol. 37, No.1, pp 7-63.

Rob, R.and P. Zemsky (2002): “Social Capital, Corporate Culture, and Incentive Intensity,” RAND Journal of Economics, Vol.33, No.2, pp 243-57.

Rustichini, A. and A. Vostroknutov (2008): “Competition with Skill and Luck,” Working paper, University of Minnesota.

Shubik, M. (1971): “Games of Status”, Cowles Foundation Paper 340, Behavioural Science, Vol.16, No.2, pp 117-129.

Sloan, R. (1993),:“Accounting Earnings and Top Executive Compensation,” Journal of Accounting and Economics, Vol. 16, No.1-2-3, pp 55-100.

Smith, C. and R. Watts (1992): “The Investment Opportunity Set and Corporate Financing Dividend, and Compensation Policies,” Journal of Financial Economics, Vol. 32, No.3, 263- 292.

Tosi, H. and L. Gomez-Mejia (1989): “The Decoupling of CEO Pay and Performance: An Agency Theory Perspective,” Administrative Science Quarterly, Vol. 34, pp 169-189.

Tosi, H. and L. Gomez-Mejia (1994): “CEO Compensation Monitoring and Firm Performance,” Academy of Management Journal, Vol.37, No. 4, pp 1002-1016.

Virany, B., M. Tushman, and E. Romanelli (1992): “Executive Succession and Organization Outcomes in Turbulent Environments: An Organization Learning Approach,” Organization Science, Vol.3, No.1, pp 72-91.

Weber, M. (1922): “Economy and Society”, translated, Berkeley: University of California Press, 1978.

Weiss, Y and C. Fershtman (1998): “Social Status and Economic Performance: A Survey”, European Economic Review, Vol. 42, pp 801-820.

Williamson, O.E (1973): “Markets and Hierarchies: Some Elementary Considerations”, The American Economic Review, Vol. 63, No. 2, pp 316-325.

Winter, E. (2004): “Incentives and Discrimination”, The American Economic Review, Vol. 94, No. 3, pp 764-773.

Wood, N. (1998): “What Motivates Best?”, Sales and Marketing Management, Vol. 150, pp 70-74.