Weak Incentives Research Articles

НОВА ІНДУСТРІАЛІЗАЦІЯ ЯК УМОВА СТАЛОГО РОЗВИТКУ ЕКОНОМІКИ УКРАЇНИ

The article is devoted to the problem of implementation of sustainable development. It is pointed out that the main feature which provides the adequate way of economic growth is the development on the basis of innovations. Considering the 2030 Agenda for Sustainable Development, which sets Sustainable Development Goals, the conclusion about the necessity of new industrialization has been made. The reasoning of this conclusion is in key features of progressive industry which are: environment friendly way of production, efficiency, innovative development. For evaluation of the ability of Ukrainian economy to conduct the transition to sustainable development the structuralist approach has been applied. It is shown that the quality of production development is represented by the place of the country in foreign market. On the basis of the structure of exporting and importing goods it has been defined that Ukrainian economy has weak conditions of trade. It is proved that current specialization on production of commodities makes it impossible to achieve sustainable development goals. First of all, the main idea of sustainable development is to prevent the exhaustion of natural resources. It is noted that commodities are mainly standardized and its production can be made by quite limited number of people. It is stressed, that these features of production provide weak incentives to implement innovations, because they create favourable conditions for monopoly rent extraction. It is pointed out that competition is highly important for stimulation of innovations. Moreover, importing high value-added goods while exporting goods with low value-added conserve the structure of economy which is unable to provide the improvement of social welfare, innovative development and development of human capital. The Prebisch-Singer hypothesis, which is based on the comparison of prices of manufactured and primary goods, was applied to uncover the fallacy of specialization on commodities. That is why it’s highly important to develop instruments of industrialization policy for Ukraine which is aimed on fundamental structural change and technological renovation of Ukrainian industry. The main idea is to build industry which is able to reproduce itself on the basis on innovative development.

Goodwill and Stock Price Crash Risk: An International Study

Using data from 43 markets around the world, we document that firms with larger goodwill balances have a higher stock price crash risk in future years. The positive association between goodwill balances and future crash risk is stronger for firms with weaker incentives to provide transparent disclosure, in markets with poorer investor protection or weaker accounting and auditing enforcement, and after periodic goodwill amortization was replaced by fair-value- based goodwill impairment. Further evidence suggests that goodwill balances are positively related to a measure of bad news withholding. Overall, the results are consistent with the view that managers have greater tendency to withhold negative information about goodwill and delay the release of information about the economic impairments of goodwill, thereby leading to increasing the likelihood of stock price crash occurrences in the future.

Analyzing the interrelationships among barriers to green procurement in photovoltaic industry: An integrated method

Although the environmental issues behind solar energy and green procurement (GP) have received increasing attention, industries still struggle to identify key barriers hindering GP and analyze the interrelationships among them. Most of the previous studies ignored the cognition uncertainty in assessing the barriers to GP, and failed to consider the impact of barrier strength on the interrelationships among barriers. This paper proposes a rough weighted method that integrates the advantages of DEMATEL (Decision-Making and Trial Evaluation Laboratory) and ISM (Interpretive Structural Modeling). Variable rough precision theory is introduced to control the cognition uncertainty and vagueness in assessing the barriers. This novel approach is then applied to analyze the interrelationships among barriers to GP in China’s photovoltaic (PV) industry. The analysis results show that internal obstacles (e.g. company’s unawareness) are more important than external obstacles (e.g. lack of legislation). However, external obstacles (especially weak incentive policies) should be solved first by policy-makers because internal obstacles are found to be caused by external obstacles. Finally, comparative studies are employed to prove the effectiveness of the proposed method. Further studies are expected to apply the proposed method to different industries and promote the development of GP.

Paris Is Not Enough: Why the Paris Agreement Isn’t Driving More Climate Action…and How It Could

While the Paris Agreement provides an indispensable framework for expanding global collaboration on climate change, countries’ initial pledges are not nearly sufficient to keep climate disruption within tolerable limits. The Agreement’s mechanism to address this shortfall relies primarily on peer review and “naming and shaming” laggards. This creates only weak incentives for countries to do more than they otherwise would to contain their emissions, and is unlikely produce sufficient new ambition. For the Agreement to generate much deeper emissions cuts over time, it must be supplemented with stronger incentives from outside of the Agreement. This paper proposes three ways that the international community can create those incentives: (1) focusing greater attention on socially beneficial mitigation opportunities; (2) establishing climate protection norms; and (3) using diplomatic “sticks” and “carrots.” It explores each of these approaches in detail, and considers how governments and civil society can use them to encourage countries to more closely align their actions with global goals.

A mechanism design approach to a buyer's optimal auditing policy to induce responsible sourcing in a supply chain

Responsible sourcing refers to the compliance of suppliers with environmental and social standards. In today's supply chains, buyers and external stakeholders use auditing mechanisms to induce responsible sourcing. For the first time, this paper investigates the effect of a buyer's audits on the tactical decisions of supply chains. We address a repeated game with one buyer and one critical supplier. At the strategic stage, the buyer chooses the optimal auditing efforts to induce responsible sourcing. At the tactical stages, the buyer and supplier compete with each other for their profit margins, while the buyer also determines the quantity of production. Moreover, the supplier chooses between responsible and irresponsible production. Two auditing mechanisms are defined for the buyer: strong incentive compatibility (SIC) and weak incentive compatibility (WIC). The effectiveness and backfiring conditions for these auditing mechanisms are identified. The former denotes that the mechanism can induce responsible sourcing, while the latter denotes the conflict between supply chain transparency and responsible sourcing. The results show that the supplier requires an efficiency wage for compliance with responsible sourcing standards. We find that auditing mechanisms in supply chains face an unintended consequence. Higher auditing efforts by the buyer reduce the supplier's wholesale price. This reduction may offset the greater potential for discovery obtained by higher auditing efforts. We also show that the effect of consumer awareness on responsible sourcing is not straightforward and depends strongly on the buyer's auditing mechanism. If the buyer chooses the SIC (WIC) auditing mechanism, consumer awareness always favors (threatens) responsible sourcing. Finally, this research suggests that coordination between buyers and external stakeholders contributes greatly to responsible sourcing.

Performance Management Goldilocks Style: A Transaction Cost Analysis of Incentive Intensity in Performance Regimes

This article advances a framework for identifying the likely implications of incentive intensity and associated transaction costs when employing performance management systems in the public sector. Performance management encompasses a broad range of systems including Managing for Results, PerformanceStat systems, performance-based contracting, and performance-based budgeting that seek to increase the capacity of government to achieve desired outcomes. These regimes share some common features, but, in practice, involve differing levels of incentive intensity, meaning the potency and certainty of the rewards and/or penalties attached to goal attainment. The article argues that increased intensity of incentives may improve organizational performance but very likely at the expense of higher governance costs. The framework is employed in a critical literature review of empirical research on performance management in the public sector. The review highlights the importance of considering the balance between weak incentives, which render few benefits, as opposed to very high-intensity incentives, which increase administrative costs while reducing benefits by encouraging gaming and other perverse responses.

Why does the behavior of local government leaders in low-carbon city pilots influence policy innovation?

Through its low-carbon city pilot program, China aims to combine national targets with local initiatives to advance low-carbon transformation and encourage policy innovations. Based on survey data collected from the low-carbon pilot cities, this paper aims to explore the impacts of the behavior of local government leadership on policy innovations from the three dimensions of leadership position, leadership participation, and leadership attention as well as the heterogeneous impacts of leaders’ behavior on policy innovations at different levels of carbon emissions intensity. This paper used the Heckman selection model to empirically analyze the factors influencing policy innovations. The results show that under circumstances with weak incentives and weak constraints, the behaviors of local leaders in low-carbon pilot cities had a positive impact on policy innovations. Specifically, the local leader at the very top of the hierarchy responsible for the pilot leadership group had a significant impact on policy innovations. Departmental-level cadres who participated exchange seminars, which refer to conducting low-carbon tests, had positive impacts on policy innovations. Nevertheless, if the local government implemented a low-carbon related strategic plan, this also had a positive effect. With the increase in carbon emissions intensity, local leaders faced pressures to reduce carbon emissions, so that the effect of the leaders’ behaviors in promoting policy innovation was greater as well.

Knowledge as Property Rights Under the Ratchet Effect of Innovation

Abstract This paper studies how reduced oversight creates an incentive for process innovation. With incomplete contracts, tight monitoring of workers creates a ratchet effect of innovation. Under reduced oversight, a worker accrues private knowledge about his innovation, which serves as a substitute for its inalienable property rights. The resulting asymmetric information generates an information rent for the worker, which feeds back as an innovation incentive ex ante. A weak early production incentive is required to complement it. Innovations are generally underutilized ex post, and mildly successful innovations are not distinguished from failed innovation attempts.

Comparative economic characteristics of environmental protection tools

The relative advantages of the tools for the environmental protection have been assessed in the article. From the economical point of view emission taxes, subsidies for abatement of emissions, and market-based permit system are more preferable in comparison with the control and management systems. The control of emissions for each organization can be achieved only in case when the marginal costs of abatement for each pollutant are known, which is unlikely in practice. In case of immiscible pollution, the determination of the marginal costs of organizations to control emissions is not required only for permitting schemes, which gives them an advantage over other tools. The least expensive for achieving a particular purpose in the fight against pollution is the tool of minimum technological requirements for the protection of the environment. The long-term effect of the instrument depends on the net income effect and the effect of technological innovation. Subsidy schemes or alternative methods of initial distribution of market permits at the expense of positive effects of income can increase the size of the industry, which is undesirable from the ecological point of view. In order to neutralize this effect, the organizations of the subsidized industry may be obliged to make one-time payments, the amount of which is the total cost of subsidies. The second way is the induced impact on the pace of technological innovation. Control and management tools have weak incentives for innovation. An emissions tax (or emission control subsidy) will encourage environmentally sound innovation. In the market scheme, emission reductions reduce taxes. Pollution control instruments have different consequences for the distribution of income in the economy and the competitiveness of the economy.

Randomized Wagering Mechanisms

Wagering mechanisms are one-shot betting mechanisms that elicit agents’ predictions of an event. For deterministic wagering mechanisms, an existing impossibility result has shown incompatibility of some desirable theoretical properties. In particular, Pareto optimality (no profitable side bet before allocation) can not be achieved together with weak incentive compatibility, weak budget balance and individual rationality. In this paper, we expand the design space of wagering mechanisms to allow randomization and ask whether there are randomized wagering mechanisms that can achieve all previously considered desirable properties, including Pareto optimality. We answer this question positively with two classes of randomized wagering mechanisms: i) one simple randomized lottery-type implementation of existing deterministic wagering mechanisms, and ii) another family of randomized wagering mechanisms, named surrogate wagering mechanisms, which are robust to noisy ground truth. Surrogate wagering mechanisms are inspired by an idea of learning with noisy labels (Natarajan et al. 2013) as well as a recent extension of this idea to the information elicitation without verification setting (Liu and Chen 2018). We show that a broad set of randomized wagering mechanisms satisfy all desirable theoretical properties.

The Interaction Effects of CEO Power, Social Connections and Incentive Compensation on Firm Value

We study the relation between company value and the interplay between CEO power, CEO equity incentives and the friendliness of the board of directors. Following Bebchuk, Cremers and Peyer (2011), we measure CEO power as the proportion paid to the CEO of the total compensation paid to the top five executives of the firm. We find that strong CEO equity incentives and the presence of a friendly board of directors both individually moderate the negative effect of CEO power on Tobin’s q. Moreover, these variables also work together. We find that firm value tends to increase when equity incentives are combined with a friendly board. We conclude that the negative effects of CEO power on firm value are limited to firms with weak CEO equity incentive compensation plans and arms-length boards of directors.

The Interaction between Industries and Executive Agencies (The Department of Environment and Administration of Economic and Finance) to Reduce Pollution: A Qualitative Study

Introduction: Nowadays, the appropriate selection of environmental instruments is considered a political priority in most countries. Given that one of the most important environmental tools in recent years to counteract industrial pollution has been levying green tax on polluting industries, the present study aims to identify interactive factors affecting the enforcement of green taxes between executive agencies [Department of Environment and Administration of Economic and Finance] and industries to reduce pollution. Materials and Methods: In this qualitative study, 13 participants from the DOE, MEFA and Deputy of Industries’ Affairs of Yazd were selected by purposive and snowball sampling. The data were collected through semi-structured interviews and then analyzed in the MAXQDA10 software by content analysis method. Results: From our data analysis, two main categories executive organizations and industries were drawn, which included 8 sub-categories tax justice, tax culture development, tax determination and tax collection, weak tax systems, tax laws, tax penalties, tax incentives and adoption of an environmental framework by the industry. Conclusion: Reforming the environmental laws, approaches and policies, emphasizing education to develop the culture of tax payment, avoiding unilateralism in enforcing environmental policies and enhancing incentive policies seem essential.

Sticking points: common‐agency problems and contracting in the US healthcare system

AbstractWe propose a “common‐agency” model for explaining inefficient contracting in the US healthcare system. Common‐agency problems arise when multiple payers seek to motivate a provider to invest in improved care coordination. We highlight the possibility of “sticking points,” that is, Pareto‐dominated equilibria in which payers coordinate around contracts which give weak incentives to the provider. Sticking points rationalize three hard‐to‐explain features of the US healthcare system: widespread fee‐for‐service arrangements; problematic care coordination; and the historical reliance on single‐specialty practices to deliver care. The model also analyzes the effects of policies promoting more efficient contracting between payers and providers.

China output up despite regulations

Our research examines the benefits and drawbacks for cooperatives who participate in voluntary coffee certifications. We interviewed administrators at twenty Costa Rican coffee cooperatives about management practices related to voluntary certification. Voluntary certifications are popular among coffee cooperatives. Access to certified markets is facilitated by state support of the cooperative sector, regulation of the coffee sector and well-enforced environmental and social laws. However, there are no significant or consistent financial incentives for farmers to pursue certification. Multiple certifications may lower auditing and implementation costs, but cooperatives rarely receive the full premium for multiply-certified coffee. Low market demand for certified coffee, weak price incentives and high auditing and management costs encourage cooperatives to certify only a portion of their members. This strategy rewards compliant farmers rather than inducing widespread change to farming practices among the entire membership. Though financial incentives are weak, certifications offer non-financial benefits to both farmers and cooperatives, including better management and more resilient cooperatives.

Principal-Agent Models Where a Principal is only Affected by Extreme Performances

In multi-agent settings, the principal can reward agents according to their rank-order achievements, or by their absolute achievements. On the other hand, the principal may be affected by the sum of the agents’ achievements or by only the highest or lowest achievement. We consider absolute rewards where the principal is only affected by the highest or lowest achievement. The scenario of highest achievement corresponds to, for example, parallel R&D teams, where only the highest/best achievement matters. The scenario of lowest achievement corresponds to, for example, an assembly system, where the number of component sets available is the minimum of the components’ quantities. The principal is assumed not to know the agent’s type in terms of its noise distribution, so he faces “ambiguity”. We derive the optimal value of a key parameter of the reward function and compare its values for different objectives. When extreme performances matter we find that a principal will employ weaker incentives for multiple agents and that the reward parameter is even smaller if only the lowest achievement is relevant. We mostly assume multiplicative uncertainty, but also address additive one. We then consider an ordinal-cardinal model.

Ultimate parent board reform and corporate overinvestment: a quasi‐natural experiment study

AbstractUsing government‐led board reform as a quasi‐natural experiment, we find that board reform at Chinese state controlling shareholders significantly alleviates overinvestment at their listed subsidiaries. The positive role of board reform in reducing overinvestment is stronger when state controlling shareholders have weak incentive to expropriate listed subsidiaries, or they can better monitor the listed subsidiaries through assigned top management. Furthermore, we find that board reform further reduces managerial cost at their listed subsidiaries. Overall, our findings suggest that government‐led board reform enhances internal governance at state controlling shareholders and has a positive effect on investment policy at their listed subsidiaries.

Solar Microgrids and Remote Energy Access: How Weak Incentives Can Undermine Smart Technology

Solar Microgrids and Remote Energy Access: How Weak Incentives Can Undermine Smart Technology

Bail-Ins, Optimal Regulation, and Crisis Resolution

We provide a framework to study bail-in regimes for banks. In the presence of a monitoring problem, the optimal bank capital structure combines standard debt, which liquidates the bank and provides strong monitoring incentives, and bail-in debt, which recapitalizes the bank but provides weaker incentives. A bail-in regime, which increases use of bail-in debt, is the optimal regulatory policy when liquidation is socially costly due to fire sales or bailouts. Bail-ins fully replace bailouts. Bail-ins can generate self-fulfilling crises in long-term debt markets, leading to bank runs. Debt guarantees and an expanded notion of lender of last resort prevent these crises, and should complement bail-ins in the crisis resolution toolkit.

The interaction effects of CEO power, social connections and incentive compensation on firm value

Using a regression interaction model and a biographical dataset, with which we can pinpoint periods during which friendships were likely to have developed, we study the relation between company value and the interplay between CEO power, CEO equity incentives and the friendliness of the board of directors. Consistent with our hypotheses developed below, we find that firm value tends to increase when equity incentives are combined with a friendly board of directors, and conclude that the negative effects of CEO power on firm value reported by others are limited to firms with weak CEO equity incentive compensation plans and arms-length boards of directors. We are the first to combine these datasets and show that friendship between powerful CEOs and their boards, when agency problems are mitigated through CEO compensation, leads to higher value.

Analiza modifikacija revizorskog mišljenja o finansijskim izveštajima listiranih kompanjia u Srbiji

In this study we shed light on the quality of financial statements of listed companies in Serbia by analyzing auditors' opinions expressed in independent auditors' reports for the 2015-2017 period. We revealed that the percentage of modified audit opinions was well above the level in developed countries, confirming weak market and regulatory incentives to improving financial reporting practices. We analyzed the propensity of different audit firms to issue modified audit opinions, as well as underlying financial reporting matters that led to modifications. The analysis revealed that the impairment of assets is the main reason for auditors' modifications, reflecting unfavorable economic reality of many companies. By expanding our analysis to the emphasis of matter paragraph in audit reports with modified, as well as unmodified audit opinion, we also provided a complete insight into the extent of appearance of the going concern issue among the listed companies.