incentive contracts

Author
Abstract

This paper presents a model of final-offer arbitration that distinguishes
between the union rank and file and their negotiator. If the union negotiator
has better information than the rank and file with regard to the bargaining
enviroment and the negotiated wage depends not only on this enviroment but also
the effort exerted by the negotiator, then the rank and file may not be able to
tell whether a poor wage outcome resulted from a poor bargaining enviroment or
because the negotiator was shirking. This is the classic principal—agent problem
with asymmetric information.
Through contract design the union rank and file could elicit the correct
behavior from the negotiator without resort to arbitration. But, as is shown in
this paper, under certain circumstances the rank and file could do better by
having the union negotiator go to arbitration some of the time. In a two state,
model it is shown that arbitration will occur only in the ‘bad’ state (where the
bargaining enviroment is unfavorable to the union). Arbitration is more likely
to serve a useful purpose in contract design the less risk averse the rank and
file, the smaller the direct costs of arbitration to the union, the more likely
the ‘good’ state of nature and the more difficult it is to induce 'truth
telling‘ in the absence of arbitration.

Year of Publication
1988
Number
233
Date Published
06/1988
Publication Language
eng
Citation Key
7968
McCall, B. (1988). Final Offer Arbitration and the Incentive to Bargain: A Principal-Agent Approach. Retrieved from http://arks.princeton.edu/ark:/88435/dsp01k643b117v (Original work published June 1988)
Working Papers
Author
Abstract

This paper shows that, in addition to varying with the calendar business cycle, manufacturing firms‘ sales
are significantly higher at the end of the fiscal year, and lower at the beginning, than they are in the
middle. The causes of these fiscal-year effects are investigated, emphasizing the role of salespeople and
their motivation to meet quotas and earn a bonus. In many industries firms have substantially lower
average prices toward the end of fiscal years, but price changes cannot explain all the effect of fiscal years
on revenue seasonality. It is shown that the industry variation in the fiscal year revenue and price effects
are correlated with type of product, distribution method, and the industry average salesperson turnover
rate. The results are consistent with a sales quota model of fiscal seasonality, where all salespeople can
vary their effort throughout the fiscal year but only some salespeople can influence the timing of their
customers’ purchases.

Year of Publication
1995
Number
354
Date Published
11/1995
Publication Language
eng
Citation Key
8142
Oyer, P. (1995). The Effect of Sales Incentives on Business Seasonality. Retrieved from http://arks.princeton.edu/ark:/88435/dsp0137720c73w (Original work published November 1995)
Working Papers