Working Paper: CEPR ID: DP2720
Authors: Pascal Courty; Gerald Marschke
Abstract: This Paper studies the provision of incentives in a large US training organization, which is divided into about 50 independent pools of training agencies. The number and the size of the agencies within each pool vary greatly. Each pool distributes performance incentive awards to the training agencies it supervises, subject to two constraints: the awards cannot be negative and the sum of the awards cannot exceed an award budget. We characterize the optimal award function and derive simple predictions about how award prizes should depend on the number of agencies, on their sizes, and on their performances. Our results indicate that the constraints on the award distribution bind and reduce the overall efficiency of the incentive system.
Keywords: fixed award budget; limited liability; performance incentive
JEL Codes: H72; J33; L14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| limited liability and fully funded constraints (G33) | reduced maximum award gap (I24) |
| reduced maximum award gap (I24) | lower effectiveness of incentives (H31) |
| limited liability (K13) | prevents principal from punishing agents (L85) |
| fully funded constraints (H60) | caps total awards (Z23) |
| limited liability and fully funded constraints (G33) | inefficient effort levels (D29) |
| diversity of budgets (H61) | effectiveness of incentives (M52) |
| relative difference in agents' budgets (H61) | inefficiently low levels of effort (D29) |
| smaller agents (L85) | disproportionately larger awards (K41) |