Deck 14: Incentives

Question 1

In a tournament,the optimal prize spread must ______ with the number of competitors in order to maintain high-effort incentives.This proposition has received wide empirical support using data on ______ .

A) decrease;CEO compensation
B) decrease;unionized workers
C) increase;CEO compensation
D) increase;unionized workers
E) not change;CEO compensation

Answer 1

C

Question 2

The value of a worker's output ______ a simple function of the units of output produced and can be measured ______.

A) is;by subjective measures
B) is;by both objective and subjective measures
C) is not;by objective measures
D) is not;by both objective and subjective measures
E) is not;by subjective measures

Answer 2

D

Question 3

Which of the following is NOT true of soft information?

A) Soft information cannot be measured by objective performance measures.
B) Work quality is an example of soft information.
C) Soft information cannot be proven in a court of law.
D) Soft information is verifiable.
E) Worker ability is an example of soft information.

Answer 3

D

Question 4

Which of the following is true of hard information?

A) Hard information can be measured subjectively.
B) Hard information is inherently unverifiable.
C) Hard information is verifiable in court.
D) Hard information cannot be measured objectively.
E) Workers' ability is an example of hard information.

Question 5

Which of the following is NOT a reason the incentive effects of OIP schemes are difficult to measure?

A) Cross-sectional data inherently involves comparisons of different workers at the same point in time.
B) It is impossible to discern whether the observed earnings differences in cross sectional data result from incentives to work harder or from systematic unobserved differences in workers who select into different earnings schemes.
C) Theoretically,workers with higher abilities will tend to select into OIP schemes.
D) Workers with higher ability are able to produce more output.
E) Workers do not increase effort under OIP schemes.

Question 6

In the principal-agent model,output ______ verifiable ex post and the price verifiable ex post.

A) is;is
B) is;is not
C) is not;is
D) is not;is not
E) may be;is

Question 7

Which of the following is NOT true of tournaments?

A) A tournament has a fixed set of prizes.
B) Tournaments use subjective rankings.
C) Tournaments are opposed by unions.
D) Prizes are allocated on the basis of cardinal rankings.
E) The payment of discretionary bonuses is an example of a tournament.

Question 8

What are the two major limitations of objective incentive payment (OIP)schemes?

A) OIP schemes encourage an emphasis on quantity at the expense of quality and the firm must use costly monitoring technology.
B) Most professions have output that is easy to quantify and the firm must use costly monitoring technology.
C) OIPs encourage shirking and the firm must use costly monitoring technology.
D) OIP schemes do not encourage productivity as much as wages do and the firm cannot measure subjective quality.
E) OIPs encourage an emphasis on quantity at the expense of quality and the firm cannot measure subjective quality.

Question 9

The ratchet effect arises from the principal's ______.As a result,agents have an incentive _____to.

A) lack of knowledge about workers' true abilities;shirk
B) desire for the agents to increase productivity;underperform
C) desire for the agents to increase productivity;shirk
D) inability to precommit to a piece rate;underperform
E) lack of knowledge about workers' true abilities;shirk

Question 10

In an environment ______ with workers,both OIPs and salaries can exist.______ attract high-ability workers while ______ attract low-ability workers.

A) homogeneous;OIP schemes;salaried schemes
B) heterogeneous;OIP schemes;salaried schemes
C) homogeneous and heterogeneous;OIP schemes;salaried schemes
D) homogeneous;salaried schemes;OIP schemes
E) heterogeneous;salaried schemes;OIP schemes

Question 11

Why might an employer use an incentive scheme rather than attempt to measure worker productivity?

A) Worker productivity can be determined by objective measures.
B) It is inexpensive to determine worker productivity over time.
C) Worker productivity is not based on effort.
D) Worker productivity is subjective.
E) Worker productivity is an example of hard information.

Question 12

Which of the following is NOT a reason incentive mechanisms are used in an organization?

A) Principals who own the firm have an incentive to shirk.
B) Agents seek to maximize their own utilities.
C) Workers at every level of an organization,including CEOs,are principals.
D) Incentive mechanisms work by better aligning the interest of workers with the firm's profit-maximizing goals.
E) Tournaments induce relatively high-effort levels.

Question 13

In the principal-agent model,the standard deviation of the expected value of effort:

A) decreases with the riskiness of the outcome.
B) captures the inherent riskiness of the environment.
C) is equal to zero.
D) is proportional to the marginal disutility of effort.
E) is increasing in a worker's ability.

Question 14

Gainsharing plans suffer from the ______,which stems from the incentives for agents to others' work.

A) 1/N problem;sabotage
B) 1/N problem;free ride on
C) N problem;sabotage
D) N problem;free ride on
E) N×N problem;sabotage

Question 15

According to Kerr's folly,

A) workers will neglect duties that are not tied directly to their compensation.
B) firms that discriminate have lower profits than do firms that do not discriminate.
C) low-ability workers will attempt to pass themselves off as high-ability workers.
D) teachers will cheat on standardized tests because their compensation is tied to students' test scores.
E) low-ability workers produce as much output as high-ability workers under an OIP scheme.

Question 16

Which of the following is an example of cream skimming?

A) hiring workers of a certain religion because they are thought to be hard workers
B) admitting only the best students to a new charter school for the underprivileged in order to have better average test scores
C) awarding prizes to top performers
D) creating a tournament scheme in order to induce workers to exert higher effort
E) teachers cheating on standardized tests because their compensation is tied to students' test scores

Question 17

In the principal-agent model,the shock ______ verifiable ex post and the agent's effort ______ verifiable ex post.

A) is;is
B) is;is not
C) is not;is
D) is not;is not
E) may be;is