Job Assignments under Moral Hazard - School of Economics and ...

More documents

Recommendations

Info

from the agent. According to Proposition 3 the (extended) Peter Principle thus holds for those who are just above the promotion threshold to job h. As illustrated in Figure 4, such an agent would produce more in his old job if he worked as hard as he does now after the promotion. 3.2.4 The profile of expected earnings and the agent’s well-being Figure 5 illustrates the cost saving effect that supports the (extended) Peter Principle. Panel (a) shows that an agent who is just at the promotion threshold (ability equal to θ SB ) earns more than he would if he remained in the lower level job. If, however, the principal wanted to have the agent work as hard in the lower level job as he does in the new job h, she would need to pay him more, as shown in Panel (b). The gap in earnings between job h and l widens the more informative job h is relative to job l (i.e., the higher k). Intuitively, the better information in job h reduces the rent the principal has to leave to the agent. This allows her to squeeze more effort out of him. The higher earnings in job h relative to the lower level job thus are the result of harder work. Panel (a) of Figure 6 illustrates this: for a fixed k a more able agent can expect to earn more than a less able colleague, both within the higher level job and across jobs. That is, the expected wage is always higher in job h than in job l. But, as a consequence of the cost saving effect, an agent in job h with an ability level close to the promotion threshold enjoys a lower utility than he would in job l (see Panel (b) of Figure 6). The expected utility increases with higher θ and soon exceeds that from working in the lower level job. This is in line with the commonly expressed view that a promotion is a desirable career move for most employees: expected utility increases for most ability levels in job h. For such an agent a promotion leads to a better job match, where higher earnings more than compensate for the increased workload. As the following proposition shows, the patterns illustrated in the figures arise in general in our model. Proposition 4 1. A promotion leads to a jump in expected earnings relative to those who remain in the lower level job l. In the higher level job h expected earnings increase with θ. 2. The net effect on expected utility relative to non-promotion for the agents in job h (a) is negative in the lower ability range; they are overpromoted, i.e., less happy than if they were in their old job with lower earnings but less work; (b) is positive for all others; for them the higher earnings compensate for the increased workload. The second result is driven by the principal’s willingness to forgo gains in expected output in order to lower the limited liability rent she has to leave to the agent. This 18
Figure 5: Expected earnings and cost saving effect (θ = θ SB ) Figure 6: Expected wage and expected utility (k = 1/32) 19
Page 1 and 2: Job Assignments under Moral Hazard
Page 3 and 4: in the hierarchy often put low dema
Page 5 and 6: promotion. 3 Bernhardt (1995) forma
Page 7 and 8: Figure 1: Illustration of the singl
Page 9 and 10: If this fails to hold the principal
Page 11 and 12: 2.4 Discussion: Biases in hierarchi
Page 13 and 14: 3.1.2 The continuous effort model O
Page 15 and 16: eSB h (θ) = 0.5 F B k eh (θ) +
Page 17: 3. In the lower ability range of jo
Page 21 and 22: Applying our simple model to a prom
Page 23 and 24: Proposition 5 Suppose job h is loca
Page 25 and 26: fh(ē, ˜ θ)−Ch(ē, ˜ θ) = fl(
Page 27 and 28: if he were instead assigned to job
Page 29 and 30: Clark, D. J., and C. Riis (2001):
Page 31: Rosen, S. (1982): “Authority, Con

Job Assignments under Moral Hazard - School of Economics and ...

Create successful ePaper yourself

Delete template?

Save as template?