The dynamics of incentives, productivity, and operational risk
Research output: Journal Publications and Reviews › RGC 21 - Publication in refereed journal › peer-review
Author(s)
Related Research Unit(s)
Detail(s)
Original language | English |
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Pages (from-to) | 181-215 |
Journal / Publication | B.E. Journal of Theoretical Economics |
Volume | 16 |
Issue number | 1 |
Online published | 17 Sept 2015 |
Publication status | Published - 1 Jan 2016 |
Link(s)
Abstract
This paper develops a dynamic principal-agent model and applies it to understand changes in labor productivity and operational risk. Our analysis demonstrates the importance of matching the terms of the job contract to the technology. Such issues would be especially important in service industries and in the knowledge-based economy where discretionary effort tends to play a greater role. We show that the production technology needs to be characterized by at least two parameters: one parameter which measures output independent of the worker's effort and a second parameter which measures the effect of the effort. We solve for the Renegotiation-Proof Nash Equilibrium. We show that there can be a tension between increasing expected productivity and controlling costs per worker. Our analysis also adds to the growing interest in "operational risk", which is associated with human actions. The closed form solutions provided by our model provide a natural way to consider the impact and possibility of this type of risk. Our analysis demonstrates why the effect of a negative event should be considered relative to a concept of normal which is based on an equilibrium, that uncertainty in the external environment enables (but does not cause) operational risk events and that both the equilibrium and the effects vary with the production technology.
Research Area(s)
- agency cost, Dynamics, incentive contract, labor productivity, operational risk, technological change
Citation Format(s)
The dynamics of incentives, productivity, and operational risk. / Anglin, Paul; Gao, Yanmin.
In: B.E. Journal of Theoretical Economics, Vol. 16, No. 1, 01.01.2016, p. 181-215.
In: B.E. Journal of Theoretical Economics, Vol. 16, No. 1, 01.01.2016, p. 181-215.
Research output: Journal Publications and Reviews › RGC 21 - Publication in refereed journal › peer-review