Preface
1. Introduction
The Economics of the Employment Relationship
The Economics of Incentives and Information
2. Optimization
“How Much” Decisions and Marginal Analysis
Global Optimization
General Lessons
A Classic Example: The Short-Run Competitive Firm
3. Traditional Labor Market Analysis
The Firm's Problem
The Worker's Problem
Labor Markets
Labor Market Analysis and Personnel Economics
4. Compensation and Motivation
Worker Effort and Efficiency
Compensation Schemes and Effort Choices
Piece rates. Straight salary. Box: Do workers on salary work less than those who are paid for performance? Quotas. Commission. Box: Do workers really work harder when commission rates go up?
General Lessons
5. Piece Rates
Piece Rates at Safelite Glass
Optimal Piece Rates
General Lessons
A Closer Look at the Salary Component
Optimal Sales Commissions
Motivating the Wrong Behavior
6. Problems with Piece Rates
Should Teachers be Paid for Performance?
Box: Do incentives lead to “teaching to the test?”
Multiple Tasks
Imperfectly-Observed Effort
General Lessons
The Equal Compensation Principle. The Incentive Intensity Principle.
7. Motivating Multiple Types
The Full-Information Case
Moral Hazard
The Optimal Contract for the Hidden-Information Setting
General Lessons
8. Game Theory
What is a Game?
The Concept of Equilibrium
Simultaneous Games
Application: Assigning duties in a team. Lessons about simultaneous games.
Simultaneous Games with Infinitely Many Possible Strategies
Application: Output in a duopoly.
Sequential Games
Lessons about sequential games.
9. Tournaments
Some Examples
A Model of a Tournament
Optimal Effort for an Individual Worker
Competition Between Workers
Box: Do larger prizes really induce more effort? A numerical example.
Implications for Motivating Workers
Pay for performance? Pay structures in hierarchies. Box: The prize structure in golf tournaments. The Peter Principle. Promotions from within vs. hiring from outside.
Tournaments when One Worker has an Advantage
Ability differences. Favoritism.
Influence Activities
Sucking up. Backstabbing. Misrepresenting Information.
10. Efficiency Wages
A Model of Efficiency Wages
Repetition. Harsh punishment. Repetition and harsh punishment together.
General Lessons
Restrictions on the Firm's Behavior
Restrictions on wage reductions. Restrictions on firing. Unemployment insurance.
11. Team Incentives
Why Teams?
Complementarities. Identification of contributions. Knowledge transfer. Fairness.
Three Approaches to Analyzing Teams
A game-theoretic approach. A public goods approach. A mathematical approach. Box: Splitting the bill in a restaurant. General lessons.
When Can Team Compensation Work?
Profit-Sharing and Gain-Sharing
12. Comparison of Incentive Schemes
Getting Workers to Work
When Can the Different Schemes be Used?
Who Gets the Surplus?
A Comparison of Problems
Choosing the Right Incentive Scheme
Technical support operators. College football coaching staffs. Dental hygienists.
13. Executive Compensation
A Few Examples
Aligning the CEO's and the Owners' Interests
Stock vs. Stock Options
Insulating CEOs from Broad Market Swings
Box: Do CEOs benefit from laying off workers?
Why are CEOs Paid So Much?
14. Performance Evaluation
A Tale of Two Firms
The Supervisor's Problem
Box: How many rating categories should there be?
The Worker's Problem
Forced Rating Distributions
General Lessons
15. Adverse Selection
Trying to Hire the Best Workers
Box: Adverse selection an hiring airport security screeners.
When Does Adverse Selection Occur?
Box: Can baseball teams identify high-productivity players?
Solving the Adverse Selection Problem
Piece rates. Probationary contracts.
Adverse Selection in Other Areas of Economics
Used cars. Car repairs. Health insurance.
16. Signaling
Getting an Education
Discounting the future. General lessons about getting an education. Some real world numbers.
Education as a Signal of Quality
Signaling and Equilibrium
Is Education Really Just a Signal?
Other Examples of Signaling
Dressing for success. Licensing. Celebrity endorsements of charities. Deductibles in insurance. Warranties. Signals in nature.
17. Search
Benefits and Costs of Search
Costs. Benefits.
Optimal Search
Important features of the optimal search rule. Box: Do people use the optimal search strategy?
Determinants of the Amount of Search
Job Search
Searching for a first job. Searching for a job when already employed. Searching for a job while collecting unemployment benefits.
18. Bargaining
The Goal of Bargaining
Sequential Bargaining
The simplest possible bargaining game. A two-round bargaining game. A three-round bargaining game.
Impatience, Uncertainty, and Risk Aversion
Impatience. Uncertainty. Risk Aversion.
The Nash Approach to Bargaining
What can we learn from the Nash bargaining solution?
General Lessons
19. Training
Training in Professional Sports
Training and Human Capital
Bargaining and the Value of Training
Bargaining. Conditions for training to occur.
Making Training Worthwhile for the Firm
Reducing the portability of skills.
Training and the Incentives to Remain with a Firm
20. Benefits
The Issue of Child Care
Preferences over Benefits and Pay
The most-preferred package vs. the one offered by the firm.
Cost Advantages for the Firm
The sources of cost advantages. Box: Pharmacies at Caesars casinos.
The Problems Faced by Small Firms