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Moral Hazard in Remote Teams
... Empirically, people are known to choose transaction partners in dilemma situations based on factors that inform the quality of that partner.Elfenbein et al. (2012), using a novel data set composed of more than 160,000 eBay listings, successfully demonstrated that in online marketplaces, buyers tend to purchase products tied to charity, and thus sellers have incentives to use a charity program (e.g., eBay's Giving Works program) as a quality signal.4 Bisetti et al. (2022) propose a self-reporting mechanism in which a team's pay is based on their observed joint output and their team's self-reported performance. They prove that a team has the incentive to under-report their group's performance (sacrifice wages for all in the team) as a punishment to free-riders, thereby enabling them to achieve higher welfare.5 Strengthening monitoring increases the probability that cyberloafing is detected and penalties are assigned, thereby reducing workers' incentives to cyberloaf. ...
Teams are increasingly popular decision-making and work units in firms. This paper uses a novel real-effort experiment to show that (a) some teams in the workplace reduce their members' private benefits to achieve a group optimum in a social dilemma and (b) such endogenous choices by themselves enhance their work productivity (per-work-time production)-a phenomenon called the "dividend of democracy." In the experiment, worker subjects are randomly assigned to a team of three, and they then jointly solve a collaborative real-effort task under a revenue-sharing rule in their group with two other teams, while each individual worker can privately and independently shirk by playing a Tetris game. Strikingly, teams exhibit significantly higher productivity (per-work-time production) when they can decide whether to reduce the return from shirking by voting than when the policy implementation is randomly decided from above, irrespective of the policy implementation outcome. This means that democratic culture directly affects behavior. On the other hand, the workers under democracy also increase their shirking, presumably due to enhanced fatigue owing to the stronger productivity. Despite this, democracy does not decrease overall production thanks to the enhanced work productivity.
Holmstrom (1982) has shown that a non-budget-balancing contract induces a team of risk-neutral agents to choose the first-best effort levels. This is not generally true when agents are risk averse. Furthermore, a "massacre" contract, which punishes all but one agent when the outcome is low, can attain the first best over a wider range of parameters than any other budget-balancing contract.
This paper shows in two ways that the degree to which free-riding diminishes the performance of deterministic partnerships
may be less than has been generally thought. First, a necessary and sufficient condition is provided for a partnership to
sustain full efficiency. It implies that many non-trivial partnerships sustain efficiency, such as generic ones with finite
action spaces, and neoclassical ones with Leontief technologies. Second, approximate efficiency is shown to be achievable in a large class of partnerships, including ones with smooth and monotonic production
and disutility functions. Approximate efficiency is achieved by mixed-strategy equilibria: one partner takes, with small probability,
an inefficient action. The degree to which efficiency is approximated is restricted only by the amount of liability the partners
can bear. Nonetheless, their equilibrium payments are not arbitrarily large.
This paper investigates pure strategy sequential equilibria of repeated games with imperfect monitoring. The approach emphasizes the equilibrium value set and the static optimization problems embedded in extremal equilibria. A succession of propositions, central among which is "self-generation," allow properties of constrained efficient supergame equilibria to be deduced from the solutions of the static problems. The authors show that the latter include solutions having a "bang-bang" property; this affords a significant simplification of the equilibria that need be considered. These results apply to a broad class of asymmetric games, thereby generalizing their earlier work on optimal cartel equilibria. Copyright 1990 by The Econometric Society.
Corruption in the public sector erodes tax compliance and leads to higher tax evasion. Moreover, corrupt public officials abuse their public power to extort bribes from the private agents. In both types of interaction with the public sector, the private agents are bound to face uncertainty with respect to their disposable incomes. To analyse effects of this uncertainty, a stochastic dynamic growth model with the public sector is examined. It is shown that deterministic excessive red tape and corruption deteriorate the growth potential through income redistribution and public sector inefficiencies. Most importantly, it is demonstrated that the increase in corruption via higher uncertainty exerts adverse effects on capital accumulation, thus leading to lower growth rates.
The mark of a capitalistic society is that resources are owned and allocated by such nongovernmental organizations as firms, households, and markets. Resource owners increase productivity through cooperative specialization and this leads to the demand for economic organizations which facilitate cooperation. When a lumber mill employs a cabinetmaker, cooperation between specialists is achieved within a firm, and when a cabinetmaker purchases wood from a lumberman, the cooperation takes place across markets (or between firms). Two important problems face a theory of economic organization – to explain the conditions that determine whether the gains from specialization and cooperative production can better be obtained within an organization like the firm, or across markets, and to explain the structure of the organization. It is common to see the firm characterized by the power to settle issues by fiat, by authority, or by disciplinary action superior to that available in the conventional market. This is delusion. The firm does not own all its inputs. It has no power of fiat, no authority, no disciplinary action any different in the slightest degree from ordinary market contracting between any two people. I can “punish” you only by withholding future business or by seeking redress in the courts for any failure to honor our exchange agreement. That is exactly all that any employer can do. He can fire or sue, just as I can fire my grocer by stopping purchases from him or sue him for delivering faulty products.
Credible monitoring of remote workers presents unique challenges that may reduce the benefits of formal organization for their management. We consider whether increasing the salience of monitor productivity without changing incentive contracts or monitoring technology leads to changes in remote worker performance. Results from a field experiment run among multi-dimensional task workers in Kenya demonstrate that increasing the visibility of monitor activity improves performance on task dimensions not being directly paid for. Our evidence is consistent with the importance of conspicuous monitoring when managers and workers are not co-located.
Flexible work arrangements present managers with challenges regarding how to manage employees using these arrangements. To date, little research has investigated how managers address these challenges. We investigate the relationship between the use of a specific implementation of flexible work (teleworking) and control system design, specifically the emphasis on output controls. Teleworking reduces the feasibility of monitoring employee behaviour as a control mechanism. Control theory suggests that this might be compensated by placing more emphasis on output controls. We conduct a survey (N = 897) among employees of a financial services institution, of whom 69% is allowed to telework. We find that among teleworking employees, the share of teleworking hours is positively related to the emphasis on output controls. However, employees who are allowed to telework report less emphasis on output controls by their manager relative to those not allowed to telework. We pose various directions for future research, which may help in explaining these findings.
In repeated normal-form (simultaneous-move) games, simple penal codes (Abreu, Journal of Economic Theory 39(1) (1986), 191–225; and Econometrica 56(2) (1988), 383–96) permit an elegant characterization of the set of subgame-perfect outcomes. We show that in repeated extensive-form games such a characterization no longer obtains. By means of examples, we identify two types of settings in which a subgame-perfect outcome may be supported only by a profile with the property that the continuation play after a deviation is tailored not only to the identity of the deviator but also to the nature of the deviation.
In
recent
years, telecommuting
has
increased
exponentially, although rates vary across different countries. The US has one of the highest rates of telecommuting adoption in the world, with approximately 16 million US employees working from home at least 1 day per month—about 10 % of all employees (Shieh and Searle SOAC 2013: 6th State of Australian Cities Conference. State of Australian Cities Research Network, 2013). In Australia, it has been estimated that in 2013, 5.6 million adult Australians aged 18 years and over were ‘digital workers’—that is, they use the internet to work away from the office (Di Gregorio Home is where the work is: Research snapshots, 2013). This represents 51 % of the total employed workforce in Australia. Telecommuting environments vary with regard to the life and work opportunities provided for telecommuters
(Shieh and Searle SOAC 2013: 6th State of Australian Cities Conference. State of Australian Cities Research Network, 2013), as well as the range of advantages and disadvantages telecommuting can provide for both workers and organizations. Consequently, this chapter reviews existing literature in order to explore how telecommuting can either contribute to, or detract from individual and
organizational flexibility. The emergence of co-working practices is also examined as a telecommuting environment that has the potential to overcome some of the issues that telecommuting poses both from the individual and organizational perspectives.
I investigate how teamwork may reduce moral hazard by joint monitoring and management. I study two organizational systems differing in the extent to which physicians may mutually manage work: Physicians are assigned patients in a “nurse-managed” system but divide patients between themselves in a “self-managed” system. The self-managed system increases throughput productivity by reducing a “foot-dragging” moral hazard, in which physicians prolong patient stays as expected future work increases. I find evidence that physicians in the same location have better information about each other and that, in the selfmanaged system, they use this information to assign patients.
We develop a model to show how agency conflicts, free-rider effects, and monitoring costs interact to affect optimal team size and workers’ incentive contracts. Team size increases with project risk, decreases with profitability, and decreases with monitoring costs as a proportion of output. Our predictions are consistent with empirical evidence that firm-specific risk has increased over time, average corporate earnings have declined, and firms’ organizational structures have also flattened. The predicted effects of monitoring costs on team size are supported by evidence that improvements in information technology likely to lower monitoring costs lead to larger teams. Further, firms with relatively more intangible assets, where monitoring costs are likely to be higher, are smaller. Optimal incentive intensities decrease with risk and increase with profitability. The endogenous determination of team size accentuates the positive effects of a decline in risk and an increase in profitability on incentives.
This paper was accepted by Gustavo Manso, finance.
As part of a recent trend toward more cooperative relations between regulators and industry, novel government programs are encouraging firms to monitor their own regulatory compliance and voluntarily report their own violations. In this study, we examine how regulatory enforcement activities influence organizations' decisions to self-police. We created a comprehensive data set for the "Audit Policy," a United States Environmental Protection Agency program that encourages companies to self-disclose violations of environmental laws and regulations in exchange for reduced sanctions. We find that facilities are more likely to self-disclose if they were recently subjected to one of several different enforcement measures and if they were provided with immunity from prosecution for self-disclosed violations.
We used data from 45 production teams (626 individuals) and their supervisors to test hypotheses related to team structure. For teams engaged primarily in conceptual tasks, interdependence exhibited a boolean OR-shaped relationship with team performance, whereas team self-leadership exhibited a positive, linear relationship with performance. For teams engaged primarily in behavioral tasks, we found a boolean AND-shaped relationship between interdependence and performance and a negative, linear relationship between team self-leadership and performance. Intrateam process mediation was found for relationships with interdependence but not for relationships with team self-leadership. Overall, findings support a model of team structure and illustrate how relationships between structural characteristics and a team's performance can be moderated by its tasks.
Faster courts favor economic development in States with sufficiently constrained executive power, whereas they harm development in States where political power is relatively unconstrained. We document this novel pattern across developing countries, and build a simple model of the State as a self-enforcing social contract, which illustrates how power, and institutions that constrain or complement it, affect development. We show a tradeoff between the two facets of power—enforcement and expropriation. As the ruler’s power grows, his temptation to shirk on enforcement diminishes while the temptation to expropriate grows. Consequently, private enforcement optimally evolves into State enforcement. Moreover, faster courts relax the ruler’s incentive constraint on enforcement but tighten his non-expropriation incentive constraint; thus, the effect on development depends on which incentive constraint binds in equilibrium. Our results are consistent with the observed cross-country patterns and with historical evidence on transition from the “Law Merchant” enforcement system to the State.
In an effort to cut costs and improve worker morale, corporations are increasingly turning to telecommuting. Conflicting reports exist though on the effects that working outside the office has on productivity which directly affects a company's bottom line. This study explores these controversies using an experimental approach. Creative and dull individual tasks were used to mimic two extreme work climates. Results of this study indicate that the telecommuting environmental effects may have positive implications on productivity of creative tasks but negative implications on productivity of dull tasks.
A rising share of employees now regularly engage in working from home (WFH), but there are concerns this can lead to “shirking
from home.” We report the results of a WFH experiment at Ctrip, a 16,000-employee, NASDAQ-listed Chinese travel agency. Call
center employees who volunteered to WFH were randomly assigned either to work from home or in the office for nine months.
Home working led to a 13% performance increase, of which 9% was from working more minutes per shift (fewer breaks and sick
days) and 4% from more calls per minute (attributed to a quieter and more convenient working environment). Home workers also
reported improved work satisfaction, and their attrition rate halved, but their promotion rate conditional on performance
fell. Due to the success of the experiment, Ctrip rolled out the option to WFH to the whole firm and allowed the experimental
employees to reselect between the home and office. Interestingly, over half of them switched, which led to the gains from
WFH almost doubling to 22%. This highlights the benefits of learning and selection effects when adopting modern management
practices like WFH. JEL Codes: D24, L23, L84, M11, M54, O31.
This study used a quasi-experimental design to assess the effectiveness of self-managing teams in a telecommunications company. These teams performed customer service, technical support, administrative support, and managerial functions in a variety of locations. The balance of evidence indicates that self-managing teams were more effective than comparable traditionally-managed groups that performed the same type of work. The study illustrates the value of a collaborative research project in which researchers and clients jointly define the research questions, study design, and methods.
Motivated by recent cartel practices, a stable collusive agreement is characterized when firms' prices and quantities are private information. Conditions are derived whereby an equilibrium exists in which firms truthfully report their sales and then make transfers within the cartel based on these reports. The properties of this equilibrium fit well with the cartel agreements in a number of markets including citric acid, lysine, and vitamins. (JEL D43, D82, K21, L12, L61, L65)
Self-reporting--the reporting by parties of their own behavior to an enforcement authority--is a commonly observed aspect of law enforcement, such as in the context of environmental and safety regulation. The authors add self-reporting to the model of the control of harmful externalities through probabilistic law enforcement and they characterize the optimal scheme. Self-reporting offers two advantages over schemes without self-reporting: enforcement resources are saved because individuals who report their harmful acts need not be detected and risk is reduced because individuals who report their behavior bear certain rather than uncertain sanctions. Copyright 1994 by University of Chicago Press.
Laws often encourage violators to self-report their crimes rather than subject themselves to probabilistic law enforcement. This paper studies the merits of self-reporting when violators otherwise face heterogeneous probabilities of apprehension. In this setting, an optimal enforcement regime does not elicit self-reporting by all violators. However, even when self-reporting enjoys none of the advantages identified elsewhere, efficiency can often be enhanced by inducing some violators those with a sufficiently high risk of apprehension to self-report. By offering a lower sanction to violators who are excessively penalized, the self-reporting option provides more efficient incentives for these individuals to avoid criminal conduct. Copyright 2000 by the University of Chicago.
Corruption in the public sector erodes tax compliance and leads to higher tax evasion. Moreover, corrupt public officials abuse their public power to extort bribes from the private agents. In both types of interaction with the public sector, the private agents are bound to face uncertainty with respect to their disposable incomes. To analyse effects of this uncertainty, a stochastic dynamic growth model with the public sector is examined. It is shown that deterministic excessive red tape and corruption deteriorate the growth potential through income redistribution and public sector inefficiencies. Most importantly, it is demonstrated that the increase in corruption via higher uncertainty exerts adverse effects on capital accumulation, thus leading to lower growth rates.
Economic theories of managing renewable resources, such as fisheries and forestry, traditionally assume that individual harvesters are perfectly rational and thus able to compute the harvesting strategy that maximizes their discounted profits. The current paper presents an alternative approach based on bounded rationality and evolutionary mechanisms. It is assumed that individual harvesters face a choice between two harvesting strategies. The evolution of the distribution of strategies in the population is modeled through a replicator dynamics equation. The latter captures the idea that strategies yielding above average profits are demanded more than strategies yielding below average profits, so that the first type ends up accounting for a larger part in the population. From a mathematical perspective, the combination of resource and evolutionary processes leads to complex dynamics. The paper presents the existence and stability conditions for each steady-state of the system and analyzes dynamic paths to the equilibrium. In addition, effects of changes in prices are analyzed. A main result of the paper is that under certain conditions both strategies can survive in the long-run.
This discussion paper has resulted in a publication in the Journal of Evolutionary Economics , 2003, 13(2), 183-200.
In repeated games, subgame-perfect equilibria involving threats of punishment may be implausible if punishing one player hurts the other(s). If players can renegotiate after a defection, such a punishment may not be carried out. We explore a solution concept that recognizes this fact, and show that in many games the prospect of renegotiation strictly limits the cooperative outcomes that can be sustained. We characterize those outcomes in general, and in the prisoner's dilemma, Cournot and Bertrand duopolies, and an advertising game in particular.
In this note we present an example of a repeated partnership game with imperfect monitoring in which all supergame equilibria
with positive discount rates are bounded away from full efficiency uniformly in the discount rate, provided the latter is
strictly positive. On the other hand, if the players do not discount the future, then every efficient one-period payoff vector
that dominates the one-period equilibrium payoff vector can be attained by an equilibrium of the repeated game. Thus the correspondence
that maps the players' discount rate into the corresponding set of repeated-game equilibrium payoff vectors is discontinuous
at the point at which the discount rate is zero.
In a partnership game, each player's utility depends on the other players' actions through a commonly observed consequence
(e.g. output, profit, price), which is itself a function of the players' actions and an exogenous stochastic environment.
If a partnership game is repeated infinitely, and each player's payoff in the infinite game (supergame) is the long-run average
of his expected one-period utilities, then efficient combinations of one-period actions can be sustained as Nash equilibria
of the supergame even if the players cannot observe other players' actions or information, but can only observe the resulting
consequences.
Much of the existing theory of incentives describes a static relationship that lasts for just one transaction. This static assumption is not only unrealistic, but the resulting predictions appear to be at odds with many work organizations. The current paper introduces possible long-term interaction among agents, and studies how the design of explicit incentives and work organizations can exploit, and interact with, the implicit incentives generated by the repeated interaction of the agents. The optimal incentive scheme is shown to display observed features of the increasingly popular "teams," such as the use of low-powered, group incentives.
A pre-recorded version of Leonid Hurwicz' Prize Lecture was presented on 8 December 2007 at Aula Magna, Stockholm University. The lecture was introduced by Professor Jorgen Weibull, Chairman of the Economics Prize Committee. (This abstract was borrowed from another version of this item.)
this paper. In addition, most of this earlier work focuses on e#ciency issues, taking monitoring or partnership size as given. striking because partners are ex ante identical, so the gains from task specialization cannot be attributed to any comparative advantage of some subset of the partners in either task, nor are there gains in scale or scope of the tasks that might drive the result. The gains from specialization arise from lessening shirking (in both monitoring and production) by having only a subset of partners engage in monitoring. Our model assumes linear sharing rules, exponential utility, and normally distributed random variables. In the typology of models laid out in Lambert (2001), our model thus falls in the class of multi-action models using the LEN framework. Such models have been used in accounting (e.g., Bushman and Indjejikian, 1993, Feltham and Xie, 1994, and Hemmer, 1995) and economics (e.g., Holmstrom and Milgrom, 1991) to study how optimal linear incentive contracts vary with the characteristics of available signals when agents must divide their e#ort across more than one task. While our study can be considered a multi-task analysis because partners must decide how much e#ort to devote to the task of producing output and the task of monitoring, monitoring is not a generic task because monitoring is undertaken by one partner to stimulate productive acts by other partners. Thus, monitoring activities arise endogenously in response to the underlying free-riding problem with respect to the productive activity. The LEN framework has also been used to study organizational form in related work by Baldenius, Melumad, and Ziv (2002), who explore how the correlation structure of monitors' signals a#ects the optimal assignment monitors to agents given fixed n...
Contracting with repeated moral hazard and private evaluations
- W Fuchs
Optimal team size and monitoring in organizations
- P J Liang
But who will monitor the monitor?
- D Rahman