JEEA‐FBBVA Lecture 2012: USE AND ABUSE OF AUTHORITY: A BEHAVIORAL FOUNDATION OF THE EMPLOYMENT RELATION

Employment contracts give a principal the authority to decide flexibly which task his agent should execute. However, there is a tradeoff, first pointed out by Simon (1951, Econometrica, 19, 293–302), between flexibility and employer moral hazard. An employment contract allows the principal to adjust the task quickly to the realization of the state of the world, but he may also abuse this flexibility to exploit the agent. We capture this tradeoff in an experimental design and show that principals exhibit a strong preference for the employment contract. However, selfish principals exploit agents in one‐shot interactions, inducing the latter to resist entering into employment contracts. This resistance to employment contracts vanishes if fairness preferences in combination with reputation opportunities keep principals from abusing their power, leading to the widespread, endogenous formation of efficient long‐run employment relations. Our results inform the theory of the firm by showing how behavioral forces shape an important transaction cost of integration—the abuse of authority—and by providing an empirical basis for assessing differences between the Marxian and the Coasian view of the firm, as well as Alchian and Demsetz's (1972, American Economic Review, 62, 777–795) critique of the Coasian approach.     

TEAM INCENTIVES: EVIDENCE FROM A FIRM LEVEL EXPERIMENT

Many organizations rely on teamwork, and yet field evidence on the impacts of team‐based incentives remains scarce. Compared to individual incentives, team incentives can affect productivity by changing both workers’ effort and team composition. We present evidence from a field experiment designed to evaluate the impact of rank incentives and tournaments on the productivity and composition of teams. Strengthening incentives, either through rankings or tournaments, makes workers more likely to form teams with others of similar ability instead of with their friends. Introducing rank incentives however reduces average productivity by 14%, whereas introducing a tournament increases it by 24%. Both effects are heterogeneous: rank incentives only reduce the productivity of teams at the bottom of the productivity distribution, and monetary prize tournaments only increase the productivity of teams at the top. We interpret these results through a theoretical framework that makes precise when the provision of team‐based incentives crowds out the productivity‐enhancing effect of social connections under team production.     

Effects of Regional Labour Markets on Migration Flows,by Education Level

European economies display large variations in unemployment rates across regions as well as between education groups. Insufficient labour mobility is widely believed to contribute to higher regional disparities and overall unemployment, but few studies have compared mobility responses of different education groups to regional shocks. This paper employs administrative registers covering the entire Norwegian population to compute annual time series from 1994 to 2004 of migration flows and regional labour market conditions by education level for 90 travel‐to‐work areas. We find that regional disparities in unemployment rates are decreasing in education level, whereas the response of migration flows to regional unemployment shocks is increasing in education level. The results suggest that low regional mobility of low‐educated workers may contribute to higher regional disparities and higher overall unemployment among the low educated.     

Efficiency Measure from Dynamic Stochastic Production Frontier: Application to Tunisian Textile, Clothing, and Leather Industries

This paper adresses the measurement of technical efficiency of textile, clothing, and leather (TCL) industries in Tunisia through a panel data estimation of a dynamic translog production frontier. It provides a perspective on productivity and efficiency that should be instructive to a developing economy which will face substantial competitive pressure along the gradual economic liberalisation process. The importance of TCL industries in Tunisian manufacturing sector is a reason for obtaining more knowledge of productivity and efficiency for this key industry. Dynamic is introduced to reflect the production consequences of the adjustment costs, which are associated with changes in factor inputs. Estimation of a dynamic error components model is considered using the system generalized method of moments (GMM) estimator suggested by Arellano and Bover (1995), Another look at the instrumental-variable estimation of error-components models, J. Econometrics68:29-51) and Blundell and Bond (Blundell, R., Bond, S. (1998a), Initial conditions and moment restrictions in dynamic panel data models. J. Econometrics87:115-143; Blundell, R., Bond, S. (1998b), GMM estimation with persistent panel data: an application to production functions, Paper presented at the Eighth International Conference on Panel Data, Goteborg University). Our study evaluates the sensitivity of the results, particularly of the efficiency measures, to different specifications. Firm-specific time-invariant technical efficiency is obtained using the Schmidt and Sickles (Schmidt, P., Sickles, R. C. (1984). Production frontiers and panel data. J. Bus. Econ. Stat.2:367-374) approach after estimating the dynamic frontier. We stress the importance of allowing for lags in adjustment of output to inputs and of controlling for time-invariant variables when estimating firm-specific efficiency. The results suggest that the system GMM estimation of the dynamic specification produces the most accurate parameter estimates and technical efficiency measure. Mean efficiency scores is of 68%. Policy implications of the results are outlined.     

Panel Seasonal Unit Root Test: Further Simulation Results and An Application to Unemployment Data

Summary: In this paper the seasonal unit root test of Hylleberg et al. (1990) is generalized to cover a heterogenous panel. The procedure follows the work of Im, Pesaran and Shin (2002) and is independently proposed by Otero et al. (2004). Test statistics are given and critical values are obtained by simulation. Moreover, the properties of the tests are analyzed for different deterministic and dynamic specifications. Evidence is presented that for a small time series dimension the power is low even for increasing cross section dimension. Therefore, it seems necessary to have a higher time series dimension than cross section dimension. The test is applied to unemployment data in industrialized countries. In some cases seasonal unit roots are detected. However, the null hypotheses of panel seasonal unit roots are rejected. The null hypothesis of a unit root at the zero frequency is not rejected, thereby supporting the presence of hysteresis effects. * The research of this paper was supported by the Deutsche Forschungsgemeinschaft. The paper was presented at the workshop “Unit roots and cointegration in panel data” in Frankfurt, October 2004 and in the poster-session at the EC2 meeting in Marseille, December 2004. We are grateful to the participants of the workshops and an anonymous referee for their helpful comments.     

Labor market assimilation and the self-employment decision of immigrant entrepreneurs

This paper uses data from the 1980 and 1990 U.S. Censuses to study labor market assimilation of self-employed immigrants. Separate earnings functions for the self-employed and wage/salary workers are estimated. To control for endogenous sorting into the sectors, models of the self-employment decision are estimated. Self-employed immigrants are found to do substantially better in the labor market than wage/salary immigrants. Earnings of self-employed immigrants are predicted to converge with natives' wage/salary earnings at about age 30 and natives' self-employed earnings at about age 40. Including the self-employed in the sample reduces the immigrant-native earnings gap by, on average, 14%. Received: 10 November 1999/Accepted: 3 August 2000     

PUBLIC EDUCATION AND PENSIONS IN DEMOCRACY: A POLITICAL ECONOMY THEORY

A dynamic political economy theory of fiscal policy is presented to explain the simultaneous existence of public education and pensions in modern democracies. The driving force of the model is the intergenerational conflict over the allocation of the public budget. Successive generations of voters choose fiscal policies through repeated elections. The political power of elderly voters creates the motive for adults to support public investment in the human capital of future generations since it expands future pension possibilities. We characterize the Markov perfect equilibrium of the voting game in a small open economy. The equilibrium reproduces salient features of intergenerational fiscal policies in modern economies.     

The gender gap in wages in Russia from 1992 to 1995

This paper examines the gender gap in wages in Russia from 1992 to 1995. It uses data on prime aged men and women from the Russia Longitudinal Monitoring Survey (RLMS) and focuses on those living in urban areas. Differences in hours of work appear to explain about one half of the gender differential, but there is still a large differential in average hourly wages between men and women. Observable differences in characteristics between men and women explain almost none of the differential or the changes through time. Received: 29 October 1997/Accepted: 24 January 2000     

Remittance volatility and financial sector development in sub-Saharan African countries

In this study we examine the relationship between remittances, remittance volatility and financial sector development in sub-Saharan Africa using a two-step system GMM estimator over the period 2002–2014. Separately focussing on banking sector- and stock market development, our study distinguishes between the effect of remittances and remittance volatility on financial sector depth and financial sector efficiency. The results indicate remittances act as a substitute for the formal banking system in sub-Saharan African countries. We further provide evidence that remittance volatility is detrimental to both banking sector depth and efficiency. No evidence is found that remittance volatility is related to stock market development. A policy implication from our study is that sub-Saharan African countries should have measures in place to monitor the predictability of remittances while the cost of remittance transfer needs to be investigated.