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2016/2017  KAN-CCMVV2608U  Incentives in Organizations

English Title
Incentives in Organizations

Course information
Language English
Course ECTS 7.5 ECTS
Type Elective
Level Full Degree Master
Duration One Quarter
Start time of the course Third Quarter
Timetable Course schedule will be posted at calendar.cbs.dk
Study board
Study Board for MSc in Economics and Business Administration
Course coordinator
  • Faculty:
    Mirjam Van Praag - Department of Innovation and Organizational Economics (INO)
  • Coordinator:
    Orsola Garofalo - Department of Innovation and Organizational Economics (INO)
Main academic disciplines
  • Managerial economics
  • Human resource management
  • Economics
Last updated on 18-02-2016
Learning objectives
To achieve the grade 12, students should meet the following learning objectives with no or only minor mistakes or errors:
  • understand core theories of motivation from economics and psychology
  • analyze optimal reward schemes to stimulate motivation from a theoretical perspective
  • learn the most important empirical insights in this field and be able to critically evaluate the main findings and implications
  • apply theoretical insights to different types of organizations and evaluate their compensation plans
  • assess the relevance of economic and psychological factors on motivation
Examination
Incentives in Organizations:
Exam ECTS 7,5
Examination form Written sit-in exam
Individual or group exam Individual exam
Assignment type Written assignment
Duration 4 hours
Grading scale 7-step scale
Examiner(s) One internal examiner
Exam period Spring
Aids allowed to bring to the exam Closed book: no aids:
  • Written sit-in-exam on CBS' computers
  • All dictionaries
Make-up exam/re-exam
Same examination form as the ordinary exam
If the number of registered candidates for the make-up examination/re-take examination warrants that it may most appropriately be held as an oral examination, the programme office will inform the students that the make-up examination/re-take examination will be held as an oral examination instead.
Course content and structure

One of the most important challenges of firm owners is to motivate firm managers to behave in line with firm value maximization. Managers, in turn, face the challenge to motivate their employees to work hard and do the right things. This is often a challenge, because managers and employees typically have conflicting objectives, and the performance of employees is not always easy to measure. How should performance be measured and what kind of incentives are best to use? Economics is a powerful tool to analyze conflicts of interest between managers and employees (or owners and managers) and the value consequences of such conflicts. It helps us to examine the optimal design of incentives. This course covers important principles of incentives and discusses the trade-offs between risk and incentives, bonuses, CEO compensation plans, distorted performance measures, and subjective performance evaluations. We also study the role of psychological factors in the workplace, such as fairness and intrinsic motivation, which yields some surprising insights. The course uses an analytical and quantitative approach using formal (game-theoretic) models and integrating empirical findings. We will also discuss some case studies to apply insights into practice.

 

The aim of this course is to get familiar with various core concepts and theories within the field of economics of organization. Being able to apply these concepts and theories to some every-day organizational phenomena within firms. The focus of the applications will be on human resource management (motivating and rewarding of both employees and executives) and corporate control.

 

Week 1:

Topic Lecture 1 (2h 15min): Purpose and setup of the course; Introduction to the economic approach of organizational issues; Introduction to important economic concepts

•  Hendrikse, G., Economics and Management of Organizations, 2003. McGraw-Hill: Chapters 1, 3 and 4, and Section 2.1

Topic Lecture 2 (2h 15min): Economic concepts for organization: game theory

• Hendrikse, G., Economics and Management of Organizations, 2003. McGraw-Hill: Sections 2.2, 2.3 and 2.4, and 10.2

  • Gibbons, R., 1997, An introduction to applicable game theory, Journal of Economic Perspectives 11, 127-149.

     

    Week 2:

    Topic Lecture 3 (2h 15min): Organizational architecture and authority

  • Aghion, P. and J. Tirole, 1997, Formal and real authority in organizations, Journal of Political Economy 105, 1-29. (AT)

  • Baker, G., Gibbons, R. and K.J. Murphy, 1999, Informal authority in organizations, Journal of Law, Economics & Organization 15, 56-73. (BGM)

  • Jensen, M.C. and W.H. Meckling, 1992, Specific and general knowledge and organizational structure, reprinted in: M.C. Jensen, 1998, Foundations of organizational strategy, Harvard University Press, Cambridge, pp. 103-125. (JM)

 

Topic Lecture 4 (2h 15min): Contracts and information

  • Hendrikse, G., Economics and Management of Organizations, 2003. McGraw-Hill: Chapter 5

  • Watson, J., 2002, Contract, law, and enforcement in static settings, Chapter 13 in: Strategy. An introduction to game theory, 115-130

  • Holt, C.A. and R. Sherman, 1994, The loser’s curse, American Economic Review 84, 642-
    652.
     

    Week 3:

    Topic Lecture 5 (2h 15min): Performance measurement, incentives and motivation

    •   Hendrikse, G., Economics and Management of Organizations, 2003. McGraw-Hill: Chapter 6

  • Lazear, E., 2000, Performance pay and productivity, American Economic Review 90, 1346-1361.

    • Hendrikse: Chapter 6, and Sections 10.1 and 10.2

  • Kerr, S., 2003, The best-laid incentive plans, Harvard Business Review 81(1), 27-37.

  • Frey, B.S. and F. Oberholzer-Gee, 1997, The costs of price incentives: An empirical analysis of motivation crowding out, American Economic Review 87, 746-755.
     

    Topic Lecture 6 (2h 15min): Incentives - Field and Lab experiments

  • Ariely, D., Gneezy, U., Loewenstein, G., & Mazar, N. (2009). Large Stakes and Big Mistakes. Review of Economic Studies, 76(2), 451–469. [8]

  • Gneezy, U., Meier, S., & Rey-Biel, P. (2011). When and why incentives (don’t) work to modify behavior. Journal of Economic Perspectives, 191-209.

  • Gneezy, U., Rustichini A. (2000a). A fine is a price. Journal of Legal studies, 1-17.

  • Gneezy, U., Rustichini A. (2000b). Pay enough or don't pay at all. Quarterly Journal of Economics, 791-810

     

    Week 4:

    Topic Lecture 7 (2h 15min): Gender differences in incentives-response

    Azmat G., Calsamiglia C., and Iriberri N. (2015). Gender Differences in Response to Big Stakes. Journal of the European Economic Association (forthcoming).

    Gneezy, U., M. Niederle and A. Rustichini (2003), “Performance in Competitive Environments: Gender Differences”, The Quarterly Journal of Economics, 118 (3), 1049-1074.

    Gneezy, U. and A. Rustichini (2004), “Gender and Competition at a Young Age”,  American Economic Review P&P, 94(2), 377-381.

    Topic Lecture 8 (2h 15min): Relative performance rewards and promotions

  • Lazear, E., 1995, Relative compensation, Chapter 3 in: Personnel Economics, MIT Press: Cambridge, pp. 25-37.

  • Lazear E. and Rosen S. 1981. Rank-order tournament as optimum labor contracts. Journal of Political Economy 89, 841-864.

 

 

Week 5:

Topic Lecture 9 (2h 15min): Subjective performance evaluation

  • Gibbons, Robert, MBA Lecture Note 3

  • G. Baker, Bob Gibbons and Kevin Murphy, 1994, Subjective performance measures in optimal incentive contracts”, Quarterly Journal of Economics 109: 1125-1156

  • Jacob, B. and Lefgren, L. (2008).  “Principals as Agents: Subjective Performance Assessment in Education.” Journal of Labor Economics. 26(1): 101-136

  • Brickley, James and Jerold Zimmerman, 2001, “Changing incentives in a multi-task environment: evidence from a top-tier business school”, Journal of Corporate Finance 7: 367-396.

    Topic Lecture 10 (2h 15min): Executive compensation and corporate governance

  • Hall, B.J. And K.J. Murphy, 2003, The trouble with stock options, Journal of Economic Perspectives 17(3), 49-70.

  • Bebchuk, L.A. and J.M. Fried, 2003, Executive compensation as an agency problem, Journal of Economic Perspectives 17(3), 71-92.

  • Cools, K. And M. Van Praag, 2004, The value relevance of top executive departures: Evidence from the Netherlands, Journal  of  Corporate  Finance,13 (5), 721-742.

Roundtable moderated by Charles Elson,2003, What’s wrong with executive compensation?, Harvard Business Review 81(1), 68-77.
Teaching methods
The teaching of this course will be based on a variety of learning methods, such as lectures, group and class discussions
Student workload
Preparation 86 hours
Exam 60 hours
Teaching 60 hours
Expected literature

Books: Hendrikse, G., Economics and Management of Organizations, 2003. McGraw-Hill

 

Articles:

  • Aghion, P. and J. Tirole, 1997, Formal and real authority in organizations, Journal of Political Economy 105, 1-29. (AT)

  • Ariely, D., Gneezy, U., Loewenstein, G., & Mazar, N. (2009). Large Stakes and Big Mistakes. Review of Economic Studies, 76(2), 451–469. [8]

  • Azmat G., Calsamiglia C., and Iriberri N. (2015). Gender Differences in Response to Big Stakes. Journal of the European Economic Association (forthcoming).

  • Baker, G., Gibbons, R. and K.J. Murphy, 1999, Informal authority in organizations, Journal of Law, Economics & Organization 15, 56-73. (BGM)

  • Bebchuk, L.A. and J.M. Fried, 2003, Executive compensation as an agency problem, Journal of Economic Perspectives 17(3), 71-92.

  • Cools, K. And M. Van Praag, 2004, The value relevance of top executive departures: Evidence from the Netherlands, Journal  of  Corporate  Finance,13 (5), 721-742.

  • Frey, B.S. and F. Oberholzer-Gee, 1997, The costs of price incentives: An empirical analysis ofmotivation crowding out, American Economic Review 87, 746-755.

  • Gneezy, U., Rustichini A. (2000a). A fine is a price. Journal of Legal studies, 1-17.

  • Gneezy, U., Rustichini A. (2000b). Pay enough or don't pay at all. Quarterly Journal of Economics, 791-810

  • Gneezy, U., M. Niederle and A. Rustichini (2003), “Performance in Competitive Environments: Gender Differences”, The Quarterly Journal of Economics, 118 (3), 1049-1074.

  • Gneezy, U. and A. Rustichini (2004), “Gender and Competition at a Young Age”,  American Economic Review P&P, 94(2), 377-381.

  • Gneezy, U., Meier, S., & Rey-Biel, P. (2011). When and why incentives (don’t) work to modify behavior. Journal of Economic Perspectives, 191-209.

  • Gibbons, R., 1997, An introduction to applicable game theory, Journal of Economic Perspectives 11, 127-149.

  • Hall, B.J. And K.J. Murphy, 2003, The trouble with stock options, Journal of Economic Perspectives 17(3), 49-70.

  • Holt, C.A. and R. Sherman, 1994, The loser’s curse, American Economic Review 84, 642- 652.

  • Jacob, B. and Lefgren, L. (2008).  “Principals as Agents: Subjective Performance Assessment in Education.” Journal of Labor Economics. 26(1): 101-136

  • Jensen, M.C. and W.H. Meckling, 1992, Specific and general knowledge and organizational structure, reprinted in: M.C. Jensen, 1998, Foundations of organizational strategy, Harvard University Press, Cambridge, pp. 103-125.

  • Kerr, S., 2003, The best-laid incentive plans, Harvard Business Review 81(1), 27-37.

  • Lazear E. and Rosen S. 1981. Rank-order tournament as optimum labor contracts. Journal of Political Economy 89, 841-864.

  • Lazear, E., 1995, Relative compensation, Chapter 3 in: Personnel Economics, MIT Press: Cambridge, pp. 25-37.

  • Lazear, E., 2000, Performance pay and productivity, American Economic Review 90, 1346-1361.

  • Roundtable moderated by Charles Elson,2003, What’s wrong with executive compensation?, Harvard Business Review 81(1), 68-77.

  • Watson, J., 2002, Contract, law, and enforcement in static settings, Chapter 13 in: Strategy. An introduction to game theory, 115-130
Last updated on 18-02-2016