Paying and Incentivizing Agents with Reference-dependent Preferences

Florian Englmaier (LMU Munich)
Felix Peterhammer (Regensburg)
Till Stowasser (Stirling)

Abstract : We document behavioral reference-point effects in a personnel-economic context. Analyzing both survey data and administrative social-security records, we show that wage perceptions are subject to substantial discontinuities. Particularly, earning slightly below or slightly above salient wage thresholds (namely multiples of EUR 1,000 in the monthly gross wage) has markedly different effects on employee satisfaction, job loyalty, and employee effort. This has important consequences for human-resource management (HRM), as the documented behavioral bias must be taken into account when incentivizing employee behavior.

Monitoring with Career Concerns

Ivan Marinovic (Stanford GSB)
Martin Szydlowski (University of Minnesota)

Abstract : We study monitoring and manipulation in a dynamic career concerns model. An agent manipulates for a private benefit and is punished when a monitor detects the manipulation. The monitor's detection ability is uncertain and requires investment to maintain. By manipulating, the agent experiments about the monitor's ability and this experimentation motive encourages manipulation. Absent detection, the belief about the monitor's ability decreases, which increases the agent's willingness to manipulate, but discourages the monitor from investing in her ability. In equilibrium, the monitor lets her ability decay, even though she could prevent manipulation forever. Surprisingly, the monitor's investment encourages manipulation. The relationship is generally inefficient and there are multiple equilibria in which the monitor over-invests. Term limits reduce manipulation by curbing the agent's experimentation motive and long-serving monitors start accepting bribes to hide detections. The optimal organizational design exploits externalities between multiple manipulating agents.

Partnership Dissolution with Cash-constrained Agents

Guillaume Pommey (Paris School of Economics)

Abstract : When partnerships come to an end, partners must find a way to efficiently reallocate the commonly owned assets to those who value them the most. This requires that the aforementioned members possess enough financial resources to buy out the others’ shares. I investigate ex post efficient partnership dissolution when agents are ex post cash constrained. I derive necessary and sufficient conditions for ex post efficient partnership dissolution with Bayesian (resp. dominant strategy) incentive compatible, interim individually rational, ex post (resp. ex ante) budget balanced and ex post cash-constrained mechanisms. Ex post efficient dissolution is more likely to be feasible when agents with low (resp. large) cash resources own more (resp. less) initial ownership rights. Furthermore, I propose a simple auction to implement the optimal mechanism. Finally, I investigate second-best mechanisms when cash constraints are such that ex post efficient dissolution is not attainable.