Profit sharing, worker effort, and double-sided moral hazard in an efficiency wage model

Chang, Juin‐jen; Lai, Ching‐chong; Lin, Chun‐Fu

doi:10.1016/s0147-5967(02)00009-4

Cited by 8 publications

(3 citation statements)

References 28 publications

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“…Many important asymmetric-information agency problems are two-sided. Consider some examples: the global financial crisis (Mishra, 2010), professional services (Sharma, 1997), firm-level profit-sharing schemes (Chang, Lai, & Lin, 2003), outsourcing (Elitzur, Gavious, & Wensley, 2012), insurance markets (Seog, 2010; Soberman, 1997), franchising (Rubin, 1978), sharecropping (Reid, 1977), product warranties (Dybvig & Lutz, 1993), headquarter-subsidiary relations (Hoenen & Kostova, 2015), joint production projects (Kim & Wang, 1998), management consulting and money-back contracts (Mann & Wissink, 1990), vertical contracting (Romano, 1994), commercial leasing (Bhattacharyya & Lafontaine, 1995), and efficiency wages in litigation (Gürtler & Kräkel, 2008). Although the two-sided agency problem has been known to economists for some time, to our knowledge, it has yet to receive attention in the literature in business ethics, and its intriguing social and/or normative implications remain unexplored.…”

Section: A Descriptive Argument For Bilateralismmentioning

confidence: 99%

The Problem of Unilateralism in Agency Theory: Towards a Bilateral Formulation

Pouryousefi

Frooman

2017

Bus. Ethics Q.

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Some business ethicists view agency theory as a cautionary tale -a proof that it is impossible to carry out successful economic interactions in the absence of ethical behaviour. The cautionarytale view presents a nuanced normative characterisation of agency, but its unilateral focus betrays a limited understanding of the structure of social interaction. This article moves beyond unilateralism by presenting a descriptive and normative argument for a bilateral cautionary-tale view. Specifically, we discuss hat swaps and role dualism in asymmetric-information principalagent relationships and argue that the norm of reciprocity can function as a moral solution to agency risks in adverse-selection and moral-hazard problems. Our novel bilateral cautionary-tale formulation extends the normative boundaries of the asymmetric-information stream of agency theory, while leaving the fundamental economic assumptions of agency theory intact.

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Section: A Descriptive Argument For Bilateralismmentioning

confidence: 99%

The Problem of Unilateralism in Agency Theory: Towards a Bilateral Formulation

Pouryousefi

Frooman

2017

Bus. Ethics Q.

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“…For instance, Canton (1995) just assumes a concave effort curve. Some related papers, such as Ringuedé (1998), Chang et al (2002) and Rigdon (2002), merely assume the worker's utility functions to be U(w, l) = w-l (linear) or U(w, l) = w-l 2 (concave), but do not derive l(w). The exceptions are Sparks (1986) and Walsh (1999).…”

Section: Figure 2 Concave L(w) With W0 As the Minimum Wagementioning

confidence: 99%

“…Some related papers, such as Ringuedé (), Chang et al . () and Rigdon (), merely assume the worker's utility functions to be U ( w , λ ) = w − λ (linear) or U ( w , λ ) = w − λ 2 (concave), but do not derive λ ( w ). The exceptions are Sparks () and Walsh ().…”

Section: Introductionmentioning

confidence: 99%

Towards a More Complete Efficiency Wage Theory

2012

Pacific Economic Review

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The efficiency wage is an important topic in the theory of employment. In a traditional efficiency wage model, only the representative firm is optimizing against an assumed S‐shaped effort supply function. This S‐shaped supply curve is critical for the model and the absence of a derivation of the curve in the literature means that it is an incomplete theory. In the present paper, we extend the model by specifying a worker's representative utility function so that the corresponding argmax function will be the S‐shaped effort supply curve. This will make the worker's decision process endogenous and will produce a more complete model. The importance of this extension is clear. The characterization of the utility function will make explicit the necessary conditions and crucial assumptions of the traditional model. More importantly, the extension will allow researchers to introduce employment compensation factors into the worker's utility function for analysis. This has important bearings on future development in employment theory. For example, a worker's satisfaction from shirking (net of dismissal risks), or his or her willingness to search for jobs (net of search cost), can now be included in his or her utility function to form an optimal work or search strategy. Incorporating the worker's optimization behaviour into the model will also enable researchers to study policy directed not just towards firms but also towards the worker's decision process. Furthermore, this approach provides a framework for researchers to generate comparative statics. These comparative statics can lead to interesting topics for econometric models or to further research within this field.

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