This paper examines the efficiency of the outside labor market in inducing optimal managerial behavior in the presence of learning. It shows that the incentives provided by the market can be more efficient than the original analysis of Holmstrom (1982) would suggest. Moreover, under a mild...

This paper presents a theory of underdevelopment. It explains why developing countries may not be able to successfully implement the productive technologies or modes of organization used in developed ones. It also suggests ways around this problem of implementation, and provides an explanation...

This paper identifies a new type of cost associated with centralization. If workers are liquidity constrained, it may be less costly to motivate a worker who is allowed to work on his own idea than a worker who is forced to follow the manager's idea. Thus, it may be optimal to let workers decide...

This paper provides a possible explanation for the empirically observed size-wage effect and inter-industry wage differences. It develops a model in which incentives for workers to accumulate general human capital are provided by corporate tournaments, where workers with the highest level of...

This paper provides a possible explanation for the empirically observed size-wage effect and inter-industry wage differences. It develops a model in which incentives for workers to accumulate general human capital are provided by corporate tournaments, where workers with the highest level of...

The corporate finance literature suggests that a financially constrained firm invests less than an identical unconstrained firm. This does not imply that financial frictions cause firms to invest less than they would in a frictionless economy. When firms compete for investment funds, an increase...

Profit-maximizing owners of firms may find it optimal to provide managers with incentives to maximize sales in addition to profits. This influences the outcome of the bargaining game between workers and managers over workers' wages and helps to solve the problem of underinvestment by workers in...

This paper models two key roles of subjective performance evaluations: their incentive role and their feedback role. The paper shows that the feedback role makes subjective pay feasible even without repeated interaction, as long as there exists some verifiable measure of performance. It also...

We examine optimal information flows between a manager and a worker who is in charge of evaluating a parameter of interest, e.g. the value of a project. The manager may possesses information about the parameter, and, if informed, may divulge her information to the worker. We show that...

Firms use subjective performance evaluations to provide employees with both incentives and feedback. This article shows that if an objective measure of performance, however imperfect, is available, subjective evaluations with incentive effects can be sustained even without repeated interaction....