MSU Efficient Wage and Tournaments Discussion
Description
Main Post:
Start a New Thread to post your answers to the discussion board.
In your main post, discuss 1 most interesting OR surprising thing (concept, idea, example, formula, graph, etc.) that you have learnt either about the role of the efficient wage and tournaments in the labor market or about why compensations are paid to the executives and teachers AND explain why.
3 attachmentsSlide 1 of 3attachment_1attachment_1attachment_2attachment_2attachment_3attachment_3.slider-slide > img { width: 100%; display: block; }
.slider-slide > img:focus { margin: auto; }
Unformatted Attachment Preview
Chapter 11
Incentive Pay
I like work; it fascinates me. I can sit and
look at it for hours.
-Jerome K. Jerome
2
Pay Systems: Piece Rates
A worker is paid a piece rate if she is paid according to the
number of the units of output she produces.
Piece rates are used by firms when it is cheap to monitor the
output of workers.
Piece-rate compensation systems attract the most able workers
and elicit high levels of effort from these workers.
©McGraw-Hill Education
3
Pay Systems: Piece Rates
Workers paid by the piece may stress quantity over quality.
Workers may being paid by the piece because of the possibility
that incomes can fluctuate significantly over time.
©
2016 McGraw-Hill
©McGraw-Hill Education
4
The Allocation of Effort by Piece-Rate Workers
The piece rate is r dollars, so the
marginal revenue of an additional
unit of output equals r. The worker
gets disutility from producing
output, as indicated by the upwardsloping marginal cost of effort
curve. The level of effort chosen by
a piece-rate worker equates
marginal revenue to marginal cost,
or q* units. If it is easier for moreable workers to allocate effort to
their jobs, they face lower marginal
cost curves and produce more
output.
©McGraw-Hill Education
5
Pay Systems: Time Rates
A worker is paid a time rate if she is paid a fixed amount per
period of time she works, such as being paid an hourly wage.
Time rates are used by firms when it is costly or impossible to
monitor the output of workers.
©
2016 McGraw-Hill
©McGraw-Hill Education
6
Effort and Ability of Workers in Piece-Rate and TimeRate Jobs
All workers, regardless of their
abilities, allocate the same
minimal level of effort to timerate jobs. Because more-able
workers find it easier to allocate
effort, they will allocate more
effort to piece-rate jobs and will
have higher earnings and utility.
Workers with more than x* units
of ability sort themselves into
piece-rate jobs, and less-able
workers choose time-rate jobs.
©
2016 McGraw-Hill
©McGraw-Hill Education
7
Bonuses, Profit-sharing, and
Team Incentives
Unlike piece-rate systems, profit-sharing programs suffer from
the incentive problems that afflict all team efforts, particularly
the free-riding problem.
Evidence suggests that profit-sharing plans increase productivity.
©
2016 McGraw-Hill
©McGraw-Hill Education
8
Tournaments
Some firms award promotions on the basis of the relative
ranking of the workers.
A tournament might be used when it is cheaper to observe the
relative ranking of a worker than the absolute level of the
workers productivity.
Workers allocate more effort to the firm when the prize spread
between winners and losers in the tournament is very large. A
large prize spread, however, also creates incentives for workers
to sabotage the efforts of other players or to quit along the way.
©
2016 McGraw-Hill
©McGraw-Hill Education
9
The Allocation of Effort
in a Tournament
The marginal cost curve
gives the pain of
allocating an additional unit
of effort to a tournament.
If the prize spread between
first and second place is
large, the marginal revenue
to an additional unit of
effort is very high (MRHIGH)
and the worker allocates
more effort to the
tournament.
©
2016 McGraw-Hill
©McGraw-Hill Education
10
Policy Application: Compensation of CEOs
There is a positive correlation between the compensation of
CEOs and the performance of the firm, but the correlation is
weak.
It is unlikely, therefore, that CEOs have the right incentives to
take only those actions that benefit the owners of the firm.
©
2016 McGraw-Hill
©McGraw-Hill Education
11
Policy Application: Incentive Pay for Teachers
Evidence is mixedit is not clear that merit rewards for teachers
increase knowledge in the student population
Incentives systems have lead to teacher cheating via revision of
student answers on standardized tests
Cheating was found to be much more likely in classrooms with a
past history of poor performancein those cases where poorforming classrooms ran the risk of being placed into probation (a
step taken that would expose teachers to reassignment,
dismissal, and school closings)
©
2016 McGraw-Hill
©McGraw-Hill Education
12
Work Incentives and
Delayed Compensation
Upward-sloping age-earnings profiles might arise because
delaying the compensation of workers until later in the life cycle
encourages them to allocate more effort to the firm.
A delayed-compensation contract implies that at some point in
the future the contract must be terminated, thus explaining the
existence of mandatory retirement in the labor market.
©McGraw-Hill Education
13
Indifference Between a Constant Wage and UpwardSloping Age-Earning Profile
If the firm could monitor a worker
easily, she would get paid her
constant value of marginal product
(VMP) over the life cycle. If it is
difficult to monitor output,
workers will shirk. An upwardsloping age-earnings profile (such
as AC) discourages workers from
shirking. Workers get paid less
than their value of marginal
product during the first few years
on the job, and this loan is
repaid in later years.
©McGraw-Hill Education
14
Efficiency Wages
Some firms might want to pay wages above the competitive
wage in order to motivate the work force to be more productive.
The efficiency wage is set such that the elasticity of output with
respect to the wage is equal to 1.
Efficiency wages create a pool of workers who are involuntarily
unemployed.
©
2016 McGraw-Hill
©McGraw-Hill Education
15
The Determination of
the Efficiency Wage
The total product curve
indicates how the firms output
depends on the wage the firm
pays its workers. The efficiency
wage is given by point X, where
the marginal product of the
wage (the slope of the total
product curve) equals the
average product of the wage
(the slope of the line from the
origin). The efficiency wage
maximizes the firms profits.
©
2016 McGraw-Hill
©McGraw-Hill Education
16
Evidence on Efficiency Wages
Intra-industry evidence supports the existence of efficiency
wages.
Evidence on efficiency wages across differing industries is mixed
and confusing, but there is some support for the existence of
efficiency wages.
Efficiency wages imply the possibility of duel labor markets,
where permanent wage differences arise due to differences in
firms ability to monitor for shirking.
The Bonding Critique: there are no worker payments to high
wage paying firms, so efficiency wage models should selfdestruct in the long run.
©
2016 McGraw-Hill
©McGraw-Hill Education
17
Why Is There a Link between Wages and Productivity?
A high wage makes it costly for workers to shirk (i.e., they lose
the wage if caught).
People who are well-paid might work harder even if there is no
threat of dismissal.
Efficiency wages reduce the quit rate and increase output and
profits.
A firm that pays efficiency wages attracts a more qualified pool
of workers, increasing the productivity and profits of the firm.
©
2016 McGraw-Hill
©McGraw-Hill Education
18
I found the concept of individual incentives quite fascinating. I learned that individual incentives
are rewards that employees receive beyond their pre-determined salary in a work environment.
There are two types of incentives: piecework plans, in which the employee is paid on the number
of units produced and their quality; and merit pay, which entails a salary that may increase based
on the performance of the individual, or by combining the performance of the individual and the
organization. For example, if the company is doing good and the employee is doing good, he/she
is rewarded; otherwise, if the company is having a marginal performance, even if he is doing
well, the reward would be significantly smaller. Other individual incentives can be bonuses,
improved pension plans, recognition-based rewards, and online reward programs.
The most surprising thing I find is the psychology of personal incentives. Many studies show that
recognition has a huge impact on performance. Many of these rewards can be non-financial. For
instance, among the things people preferred the most, we can mention trips, shopping, home
improvements, season tickets for entertainment events, and electronics. We also know that every
individual is different. The employee must understand individual preferences and needs
Purchase answer to see full
attachment
Explanation & Answer:
400 words
Tags:
EFFICIENT WAGE AND TOURNAMENTS
User generated content is uploaded by users for the purposes of learning and should be used following Studypool’s honor code & terms of service.
