Social exchange and common agency in organizations

We study the relation between formal incentives and social exchange in organizations where employees work for several managers and reciprocate a manager’s attention with higher effort. To this end we develop a common agency model with two-sided moral hazard. We show that when management attention is not contractible, the first-best can only be achieved by granting autonomy to employees together with incentive pay for both managers and employees. When neither attention nor effort are contractible, an ‘attention race’ arises, as each manager tries to sway the employee’s effort his way. While this may result in too much social exchange, the attention race may also be a blessing because it alleviates managers’ moral-hazard problem in attention provision. Lastly, we show how organizational structure can be used to motivate managers and employees in the absence of formal incentives.     

Moral hazard in marriage: the use of domestic labor as an incentive device

This paper argues that some women in developing countries use domestic labor as a tool to incentivize husbands. A theoretical model is derived based on the traditions of rural Malawi, where men often supplement farm income with wage labor. As wage labor is not observed by the wife, this creates moral hazard: husbands may not make enough effort to bring home wages. The model predicts that women overcome this by using domestic labor as an incentive device: they increase their domestic labor and reduce their leisure in response to good consumption outcomes, but only if they cannot rely on divorce threat as an alternative source of incentives. This prediction is confirmed using survey data from Malawi. Identification is based on the fact that Malawi’s kinship traditions exogenously determine women’s accessibility to divorce. Where divorce is not an option, women make inefficient labor choices in order to provide incentives.     

Replication: Cheating,loss aversion,and moral attitudes in Vietnam

We use the coin-flip paradigm and a short survey about moral attitudes under three conditions to answer three questions: (i) Do people cheat more when financial incentives are present in comparison with no incentives? (ii) Do they find it more difficult to maintain their ethical standards when they have been given a small amount of money? and (iii) Do moral attitudes predict cheating behavior? Using a sample of Vietnamese college students, we discover that a financial incentive does not matter until people feel that they are facing a loss. In addition, we do not find any evidence that moral attitudes could predict the unethical behavior in our sample. Our findings shed further light on cheating behaviors and loss aversion through an experimental investigation.     

PROMOTIONS AS WORK INCENTIVES

Why do professional partnerships like law firms, accounting practices, and management consulting groups to name a few, rely almost exclusively on promotions for incentives and do not typically use incentive pay to motivate their associates? We compare three schemes (relative-input-based piece rates, tournaments with monetary prizes, and tournaments with promotions as prizes) within an environment characterized by group production and double moral hazard induced by possible wealth constraints on the supervisors. We find that the difficulty in implementing promotion tournaments is possibly an important reason for the existence of firms.     

Limited liability and its moral hazard implications: the systemic inscription of instability in contemporary capitalism

The principle of limited liability is one of the defining characteristics of modern corporate capitalism. It is also, we argue in this article, a powerful structural source of moral hazard. Engaging in a double conceptual genealogy, we investigate how the concepts of moral hazard and limited liability have evolved and diffused over time. We highlight two parallel but unconnected paths of construction, diffusion, moral contestation, and eventual institutionalization. We bring to the fore clear elective affinities between both concepts and their respective evolution. Going one step further, we suggest that both concepts have come to be connected through time. In the context of contemporary capitalism, limited liability has to be understood, we argue, as a powerful structural source of moral hazard. In conclusion, we propose that this structural link between limited liability and moral hazard is an important explanatory factor of the systemic instability of contemporary capitalism and, as a consequence, of a pattern of recurrent crises that are regularly disrupting our economies and societies.     

CIVIL ASSET FORFEITURE,CRIME, AND POLICE INCENTIVES: EVIDENCE FROM THE COMPREHENSIVE CRIME CONTROL ACT OF 1984

The 1984 federal Comprehensive Crime Control Act (CCCA) included a provision that permitted local law enforcement agencies to acquire up to 80% of the proceeds derived from civil asset forfeitures obtained in joint operations with federal authorities. We investigate how this rule governing forfeited assets influenced crime and police incentives by taking advantage of pre‐existing differences in state‐level civil asset forfeiture law and the timing of the CCCA. We find that after the CCCA was enacted crime fell about 17% in places where the federal law allowed police to retain more of their seized assets than state law previously allowed. (JEL K42, K15, H76)     

Work discipline and lay-offs: Is there a trade-off between wages and job security?

It is usually argued that workers can trade off wages and job security, an argument with limited empirical support. This article develops a worker discipline model where work effort involves a moral hazard problem, such that firms set wages and monitoring levels to reduce potential shirking. It is shown that the efficacy of such incentives might be reduced by an increased probability of lay-offs, in which case job security and high wages will be positively and not inversely related. The author thanks the following individuals for helpful comments (not always accepted) on various drafts of this paper: Roy Boyd, Satya Das, Gerry Duguay, Herbert Gintis, Donald Katzner, Tong Hun Lee, Richard Perlman, James Rebitzer, G. Richard Meadows, Mark Meitzen, W. Stanley Seibert, and Geoffrey K. Turnbull. He also thanks Donna Bennett of the Social Science Research Facility at UWM for technical assistance.     

Incentives for Increasing Return Rates: Magnitude Levels, Response Bias, amd Format

The use of monetary incentives has been shown to significantlyincrease response rate. However, previous investigations haverarely investigated the effects of incentives greater than $1,compared different magnitudes of incentives, or investigatedresponse bias due to incentives. The current study also investigatedthe utility of an Answer Check. Results suggest that monetaryincentives increase response rate, larger incentives do notnecessarily further increase survey response, incentives donot appear to bias responses, and the Answer Check does notfacilitate response rate.     

THE HAZARDS OF MORAL HAZARD: COMMENT ON GOFF, SHUGHART, AND TOLLISON

Goff et al. [1997] argue that the sharp increase in the number of hit batsmen after the adoption of the designated hitter rule is due to moral hazard. I argue instead that simple changes in the composition of batters faced explains much of the observed effect. Pitchers are bad hitters and therefore are much less likely to be hit than their designated hitters. Furthermore, there is no correlation between the frequency with which individual pitchers hit opposing batsmen and their personal likelihood of being hit by a pitch while batting, contrary to the predictions of the moral hazard model. ( JEL D81, J28)     

Moral Identity in Friendships between Gay,Lesbian, and Bisexual Students and Straight Students in College

People construct moral identities for being a supportive affiliate of stigmatized groups. To extend past research that focused on such identities within formal organizations, this study seeks to identify the process of moral identity construction in a personal setting—friendships between gay, lesbian, and bisexual (GLB) people and straight people. Analyzing data from in‐depth interviews with college students, we show that straight students claim moral worth by emphasizing their deliberate decisions to develop and sustain friendships with GLB people and by highlighting how the friendships led them to personal enlightenment and political engagement. GLB students, as a stigmatized group, also claim moral worth by emphasizing their ability to transcend the community boundary and to be accepted in the larger society. Students make such claims as they strategically link these aspects of cross‐orientation friendships to existing moral discourses in the larger society and draw on resources available in the organizational and life course contexts.     

LIMITED LIABILITY,MORAL HAZARD,AND RISK TAKING: A SAFETY NET GAME EXPERIMENT

We model the safety net problem as a social dilemma game involving moral hazard, risk taking, and limited liability. The safety net game is compared to both an individual decision task involving full liability and the deterministic public goods game. We report experimental data to show that limited liability leads to higher risk taking in comparison to full liability; nevertheless, the difference is much smaller than predicted by theory. In the safety net game, subjects behave as if socially responsible for the losses they impose on the group. With repetition, nevertheless, a gradual emergence of the moral hazard problem arises. (JEL C9, D7, D8, H4, I1, I3)     

From Welfare to Work? Social Policy for Disabled People of Working Age in the United Kingdom in the 1990s

Disabled people of working age have been at the heart of recent welfare restructuring in the United Kingdom, but this has received little attention from mainstream social policy analysis. Both Conservative and Labour governments have introduced measures to promote labour force participation among disabled people, whilst discouraging dependence on welfare benefits. Whilst this new approach has been justified in terms of reducing poverty, its underlying imperatives are essentially inegalitarian. The welfare reform process has been driven by a number of official concerns including a perception of unsustainable fiscal pressures and a belief that perverse incentives in the social security benefit system have undermined economic efficiency. Moreover, it has been legitimated by an ideology of citizenship, which has shifted the moral responsibility for needs satisfaction away from the state to the individual. The paper concludes by identifying a better approach to welfare reform for disabled people of working age.     

Monetary incentives in support of academic achievement: results of a randomized field trial involving high-achieving, low-resource, ethnically diverse urban adolescents

Significant resources have been directed at understanding and alleviating the achievement gap in education. Most programs focused on this aim rely on a top-down approach, including funding for infrastructure improvement, curriculum development, class size, and teacher salaries. This article presents findings from a randomized field trial that evaluates a bottom-up approach in which high-achieving students of diverse racial and ethnic backgrounds from poor families are given monetary incentives to maintain their academic standing. The evaluation was designed to explore the role of monetary incentives as a mechanism for promoting resiliency in the face of poverty-related challenge. Discussion of what motivates students to learn is framed as a function of normal cognitive and socioemotional development in challenging environments. Evaluation findings indicate that monetary incentives are effective in promoting academic success to different degrees and for different reasons depending on students' perception of the meaning of the incentive in relation to their emergent identity.     

Moral hazard and stability

Economists perceive moral hazard as an undesirable problem because it undermines efficiency. Carefully designed contracts can mitigate the moral hazard problem, but this assumes that a team is already formed. This paper demonstrates that these contracts are sometimes the reason why teams do not form. Formally, we study the team formation problem in which the agents’ efforts are not verifiable and the size of teams does not exceed quota \(r\) . We show that if the team members cannot make transfers, then moral hazard affects stability positively in a large class of games. For example, a stable team structure exists if teams produce public goods or if the quota is two. However, these existence results no longer hold if efforts are verifiable.     

Moral hazard and free riding in collective action

Most political and economic theorists point to moral hazard in teams as the main obstacle to lobbies’ collective action. In this paper, we address this important issue with a coalition-formation game. In the process of doing so, we characterize equilibrium lobby structures both in the absence and in the presence of moral hazard. Three notable results emerge from such an exercise: (1) an equilibrium lobby structure exists under both specifications of the model, (2) moral hazard in teams may raise large groups’ equilibrium lobby size, and (3) it may also raise the level of collective action of large groups with low organizational costs. I wish to express my appreciation to Helmuth Cremer, Philippe De Donder, Kai A. Konrad, Michel Le Breton, Daniel Seidmann, Shlomo Weber, an associate editor of this journal and a referee for valuable comments and suggestions. I am also grateful to Paul Belleflamme, Francis Bloch, Robert Dur, Joan Esteban, Debraj Ray, and the audience at the CESifo Area Conference on Public Sector Economics 2006 and at the 15th Aix-Marseille SSIEIO for helpful discussions.     

Shared losses reduce sensitivity to risk: A laboratory study of moral hazard

Moral hazards are said to occur when one party makes decisions that have potential negative consequences that will either be fully or partially experienced by another party. The present experiment sought to explore moral hazard in a laboratory setting. Participants made choices between certain and risky rewards. On some trials, participants bore the full brunt of a loss if the risky reward was chosen and lost. On other trials, participants believed losses would be shared with another party creating the opportunity for moral hazard. Our design allowed us to measure whether the presence of a moral hazard influenced participants’ choice behavior and to quantify the magnitude of this influence. Results suggested that participants were more tolerant of risk when they believed losses would be shared with another party compared to choices when all of the loss would be experienced personally. More importantly, concern for the third party losses appeared to exert no influence on choices whatsoever. These results were found when the third party was anonymous (Experiment 1) but also when they met the third party face-to-face (Experiment 2). The relationship between the current results and real-life moral hazards, as well as possible future research directions, is discussed.     

INDIVIDUAL WELFARE WHEN CONSUMERS CAN SHOP FOR HEALTH INSURANCE

The statewide system of health insurance exchanges established by the Affordable Care Act (ACA) of 2010 will allow millions of U.S. citizens to change their health care policies more easily than they can switch automobile or homeowner insurance coverages, because deniability based on prior claim history is illegal. Focusing on this consumer endogeneity of health insurance policy choice, we examine the individual moral hazard welfare implications of a reduction in the price of medical care, which is a potential consequence of the ACA. We show that endogenous policy choice plays a key role in determining the welfare outcome. While moral hazard welfare improvement is not precluded, a distinctly possible outcome is that the consumer revises his/her choice of insurance policy so as to retain some portion of the reduction in expenditure risk caused by the medical care price decrease. In this event, moral hazard welfare loss is higher than it was before the price decrease, although the increased loss is tempered by the endogenous contract choice effect. This result resuscitates an old conventional wisdom. (JEL I11, I13, I30)     

MORAL HAZARD AND THE EFFECTS OF THE DESIGNATED HITTER RULE REVISITED

New evidence seems to cast doubt on the hypothesis that the American League's adoption of the designated hitter (DH) rule in 1973 created a moral hazard problem for pitchers. In particular, the substitution of hard-hitting DHs for weak-hitting pitchers in the American League supposedly explains the lion's share of inter-league differences in hit batsmen. However, theoretical and empirical questions about the explanatory power of this alternative hypothesis lead us to the conclusion that moral hazard remains the most plausible reason why more AL than NL batters have been hit by pitches in 22 of the past 25 seasons. ( JEL D81, J28)     

Rebates, inventories, and intertemporal price discrimination

We demonstrate that universally redeemed rebates can increase manufacturer profits by reducing the incentives of downstream retailers to hoard inventories when optimal wholesale prices vary predictably over time. By bypassing retailers and making direct contracts with buyers, the manufacturer can increase the variations in effective prices paid by consumers without concomitantly creating larger incentives for retailers to hold inventories. During profitable, high-demand periods, manufacturer revenues are ordinarily constrained by'competition'from retailer inventories, thus limiting profits. However, by selectively offering rebates to consumers while maintaining high wholesale prices, low-demand periods can be accommodated without inducing retailer hoarding.     

Charitable giving and lay morality: understanding sympathy,moral evaluations and social positions

This paper examines how charitable giving offers an example of lay morality, reflecting people's capacity for fellow‐feeling, moral sentiments, personal reflexivity, ethical dispositions, moral norms and moral discourses. Lay morality refers to how people should treat others and be treated by them, matters that are important for their subjective and objective well‐being. It is a first person evaluative relation to the world (about things that matter to people). While the paper is sympathetic to the ‘moral boundaries’ approach, which seeks to address the neglect of moral evaluations in sociology, it reveals this approach to have some shortcomings. The paper argues that although morality is always mediated by cultural discourses and shaped by structural factors, it also has a universalizing character because people have fellow‐feelings, shared human conditions, and have reason to value.