Chapter 11 Incentive Pay

A firm owner wants a manager to make difficult personnel decisions when necessary (which requires firing a worker every now and then) in order to maximize the firm's profits. The manager, however, prefers to not fire anyone. The worker also prefers not to be fired. In this example, who is the principal and who is the agent?

A. The firm owner is the principal. The manager is the agent.

What happens to the piece rate if there is a ratchet effect?

A. The piece rate decreases over time.

An efficiency wage is defined as

A. a wage above the competitive wage that elicits greater effort on the part of the workers.

Piece rates typically

A. encourage greater effort from workers.

A standard efficiency wage model pays workers higher wages in order to increase worker efficiency. As a result, firm profits increase and there is a pool of involuntarily unemployed workers. In this model, if the firm's cost of monitoring effort falls,

A. the efficiency wage will fall.

To pay piece rates in order to elicit effort, it must be the case that

A.the firm can monitor individual worker output.

One piece of evidence in favor of the efficiency wage model is that some sectors of the economy pay relatively high wages, whereas other sectors pay lower wages. This supports the efficiency wage model as it seems to provide evidence of what?

A. The existence of dual labor markets.

Which of the following is a possible disadvantage of a tournament?

A. Competitors have little incentive to help one another (and they may even sabotage each other's work). B.Workers will stop providing effort as soon as they believe they have no chance to win the prize. C.Workers may collude to share the prize in order to provide lower levels of effort. D.The outcome of a tournament may appear to be random. E.All of the above are possible disadvantages of a tournament.

One argument against using a profit-sharing scheme is the potential for free-riding. In this situation, free-riding refers to

B. a worker not providing effort because his contribution to profit is very small.

A piece rate compensation system

B. attracts and benefits the most able workers.

If designed correctly, tournaments

B. reward players according to their ranked productivity.

Empirically, the relationship between CEO performance (measured in terms of share price) and CEO compensation is

B. small and positive.

A firm that finds it extremely expensive to monitor the output of each worker will likely pay its workers

B. with time rates.

A standard efficiency wage model pays workers higher wages in order to increase worker efficiency. As a result, firm profits increase and there is a pool of involuntarily unemployed workers. This equilibrium comes about in part because

B. workers are less likely to shirk when there is a pool of unemployed workers who are willing to take their job.

The bonding critique criticizes the model of efficiency wages because

B. workers should be willing to give the firm collateral that the firm would keep if the firm ever caught the worker shirking, and in exchange the worker would be willing to work for a wage less than the efficiency wage.

The idea of linking public school teacher salaries to student outcomes is basically an attempt to impose a ____________ compensation scheme on teachers.

B.piece-rate

Which one of the following statements about piece rate compensation schemes is false?

C. Piece rate systems are preferred by discriminatory firms.

Suppose a firm overpays its workers at the start of the job, and then the firm slowly lowers wages over time until eventually the firm pays the workers considerably less than the worker's marginal product of labor. What prevents this "reverse of a delayed-compensation scheme" from being implemented?

C. Workers would leave the job as soon as the firm tries to pay the worker less than his or her value of marginal product.

The optimal efficiency wage requires

C. firms to pay the unique wage above the competitive wage such that the elasticity of output with respect to wages equals one.

When considering the running of a corporation, there is a principal-agent problem between shareholders and the CEO because

C. shareholders cannot observe all of the CEO's decisions.

Principal-agent problems arise when

C. the agent's objectives are different from the principal's objectives.

One disadvantage of using a tournament is that

C. workers who view themselves as losing the tournament will quit providing effort.

Which is not true regarding a delayed-compensation contract?

D. A delayed-compensation contract necessarily costs more in labor costs than a time-rate system.

Which of the following statements is false?

D. Free-riding can result from a compensation scheme that gives competitive individual bonuses.

Which one of the following statements best describes profit sharing?

D. Profit sharing provides a system by which workers receive a share of the firm's profits.

What prevents a firm from offering a delayed-compensation scheme to its employees and then firing each worker when the worker's wage exceeds his or her value of marginal product?

D. The firm would lose the trust of the workers, and new workers would not accept the payment scheme.

Which of the following is not true regarding the incentives different pay structures impose on workers?

D. Worker productivity is unrelated to the pay structure.

Middle-aged workers being paid more than their younger counterparts is likely due to

D. firms using a delayed compensation scheme.

Which of the following is not likely to help a firm motivate its workers to put forth more effort?

E. All of these are likely to motivate workers to put forth more effort.

Under a piece rate pay scheme where all workers face different upward-sloped marginal cost curves for providing effort,

E. workers with higher marginal cost curves for providing effort will produce less output than workers with lower marginal cost curves.