Compensation, Incentives and Risk: Economic Theory and Russian Practise

Mr. Pechersky set out to examine a specific feature of the employer-employee relationship in Russian business organisations. He wanted to study to what extent the so-called "moral hazard" is being solved (if it is being solved at all), whether there is a relationship between pay and performance, and whether there is a correlation between economic theory and Russian reality. Finally, he set out to construct a model of the Russian economy that better reflects the way it actually functions than do certain other well-known models (for example models of incentive compensation, the Shapiro-Stiglitz model etc.). His report was presented to the RSS in the form of a series of manuscripts in English and Russian, and on disc, with many tables and graphs. He begins by pointing out the different examples of randomness that exist in the relationship between employee and employer. Firstly, results are frequently affected by circumstances outside the employee's control that have nothing to do with how intelligently, honestly, and diligently the employee has worked. When rewards are based on results, uncontrollable randomness in the employee's output induces randomness in their incomes. A second source of randomness involves the outside events that are beyond the control of the employee that may affect his or her ability to perform as contracted. A third source of randomness arises when the performance itself (rather than the result) is measured, and the performance evaluation procedures include random or subjective elements. Mr. Pechersky's study shows that in Russia the third source of randomness plays an important role. Moreover, he points out that employer-employee relationships in Russia are sometimes opposite to those in the West. Drawing on game theory, he characterises the Western system as follows. The two players are the principal and the agent, who are usually representative individuals. The principal hires an agent to perform a task, and the agent acquires an information advantage concerning his actions or the outside world at some point in the game, i.e. it is assumed that the employee is better informed. In Russia, on the other hand, incentive contracts are typically negotiated in situations in which the employer has the information advantage concerning outcome. Mr. Pechersky schematises it thus. Compensation (the wage) is W and consists of a base amount, plus a portion that varies with the outcome, x. So W = a + bx, where b is used to measure the intensity of the incentives provided to the employee. This means that one contract will be said to provide stronger incentives than another if it specifies a higher value for b. This is the incentive contract as it operates in the West. The key feature distinguishing the Russian example is that x is observed by the employer but is not observed by the employee. So the employer promises to pay in accordance with an incentive scheme, but since the outcome is not observable by the employee the contract cannot be enforced, and the question arises: is there any incentive for the employer to fulfil his or her promises? Mr. Pechersky considers two simple models of employer-employee relationships displaying the above type of information symmetry. In a static framework the obtained result is somewhat surprising: at the Nash equilibrium the employer pays nothing, even though his objective function contains a quadratic term reflecting negative consequences for the employer if the actual level of compensation deviates from the expectations of the employee. This can lead, for example, to labour turnover, or the expenses resulting from a bad reputation. In a dynamic framework, the conclusion can be formulated as follows: the higher the discount factor, the higher the incentive for the employer to be honest in his/her relationships with the employee. If the discount factor is taken to be a parameter reflecting the degree of (un)certainty (the higher the degree of uncertainty is, the lower is the discount factor), we can conclude that the answer to the formulated question depends on the stability of the political, social and economic situation in a country. Mr. Pechersky believes that the strength of a market system with private property lies not just in its providing the information needed to compute an efficient allocation of resources in an efficient manner. At least equally important is the manner in which it accepts individually self-interested behaviour, but then channels this behaviour in desired directions. People do not have to be cajoled, artificially induced, or forced to do their parts in a well-functioning market system. Instead, they are simply left to pursue their own objectives as they see fit. Under the right circumstances, people are led by Adam Smith's "invisible hand" of impersonal market forces to take the actions needed to achieve an efficient, co-ordinated pattern of choices. The problem is that, as Mr. Pechersky sees it, there is no reason to believe that the circumstances in Russia are right, and the invisible hand is doing its work properly. Political instability, social tension and other circumstances prevent it from doing so. Mr. Pechersky believes that the discount factor plays a crucial role in employer-employee relationships. Such relationships can be considered satisfactory from a normative point of view, only in those cases where the discount factor is sufficiently large. Unfortunately, in modern Russia the evidence points to the typical discount factor being relatively small. This fact can be explained as a manifestation of aversion to risk of economic agents. Mr. Pechersky hopes that when political stabilisation occurs, the discount factors of economic agents will increase, and the agent's behaviour will be explicable in terms of more traditional models.

Interethnic Interaction Dynamics in the Russian Federation

The collapse of the Soviet Union at the beginning of the 1990s also meant the end of the idea of a common soviet identity incarnated in the "soviet man" and the new "historic community of the soviet people". While this idea still lives on in the generations of the 1920s to 1940s, the younger generations tend to prefer identification with family, profession, ethnic group or religion. Ms. Alexakhina set out to investigate different interethnic interaction strategies in the multi-ethnic context of the Russian Federation, with an emphasis on analysing the role of cultural and ethno-demographic characteristics of minority ethnic groups. It aimed to identify those specific patterns of interaction dynamics that have emerged in response to the political and economic transformation at present under way. The basic supposition was that the size and growth of an ethnic population are defined not only by demographic features such as fertility, mortality and net migration, but are also dependent on processes interethnic interaction and ethnic transition. The central hypothesis of the project was that the multi-ethnic and multi-cultural composition of Russia is apparently manifesting itself in the ethnic minority groups in various forms, but particularly in the form of ethnic revival and/or assimilation. The results of these complex phenomena are manifested as changes in ethnic attachments (national re-identification and language behaviour (multi-lingualism, language transition and loss of the mother tongue). The stress of the political and economic crisis has stimulated significant changes in ethnographic, social and cultural characteristics of inter-ethnic dynamics such as the rate of national re-identification, language behaviour, migration activity and the spread of mixed marriages, among both those minorities with a long history of settlement in Russia and those that were annexed during the soviet period. Patterns of language behaviour and the spread of mixed marriages were taken as the main indicators of the directions of interethnic interaction described as assimilation, ethnic revival and cultural pluralism. The first stage of the research involved a statistical analysis of census data from 1959 to 1994 in order to analyse the changing demographic composition of the largest ethnic groups of the Russian Federation. Until 1989 interethnic interaction in soviet society was distinguished by the process of russification but the political and economic transformation has stimulated the process of ethnic revival, leading to an apparent fall in the size of the Russian population due to ethnic re-identification by members of other ethnic groups who had previously identified themselves as Russian. Cross-classification of nationalities by demographic, social and cultural indicators has shown that the most important determinants of the nature of interethnic interaction are cultural factors such as religion and language affiliation. The analysis of the dynamics of language shift through the study of bilingualism and the domains of language usage for different demographic groups revealed a strong correlation between recognition of Russian as a mother tongue among some non-Russian ethnic groups and the declining size of these groups. The main conclusion from this macro-analysis of census data was the hypothesis of the growing importance of social and political factors upon ethnic succession, that ethnic identity is no longer a stable characteristic but has become dynamic in nature. In order to verify this hypothesis Ms. Alexakhina conducted a survey in four regions showing different patterns of interethnic interaction: the Karelian Republic, Buryatiya, the Nenezkii Autonomous Region and Tatarstan. These represented the west, east, north and south of the Russian Federation. Samples for the survey were prepared on the basis of census lists so as to exclude mono-Russian families in favour of mixed and ethnic-minority families. The survey confirmed the significant growth in the importance of ethnic affiliation in the everyday lives of people in the Federation following the de-centralisation of the political and economic spheres. Language was shown to be a key symbol of the consciousness of national distinction, confirmed by the fact that the process of russification has been reversed by the active mastering of the languages of titular nationalities. The results also confirmed that individual ethnic identity has ceased to be a fixed personal characteristic of one's cultural and genetic belonging, and people's social adaptation to the current political, social and economic conditions is also demonstrated in changes in individual ethnic self-identification. In general terms, the dynamic nature of national identity means that ethnic identity is at present acquiring the special features of overall social identity, for which the frequent change of priorities is an inherent feature of a person's life cycle. These are mainly linked with a multi-ethnic environment and high individual social mobility. From her results Ms. Alexakhina concludes that the development of national languages and multi-lingualism, together with the preservation of Russian as a state language, seems to be the most promising path to peaceful coexistence and the development of the national cultures of different ethnic groups within the Russian Federation.

Formation of Exchange Rates on the Russian Market: Dynamics and Modelling

Galina Kovaleva. The Formation of the Exchange Rate on the Russian Market: Dynamics and Modelling. The Russian financial market is fast becoming one of the major sectors of the Russian economy. Assets have been increasing steadily, while new market segments and new financial market instruments have emerged. Kovaleva attempted to isolate the factors influencing exchange rates, determine patterns in the dynamic changes to the rouble/dollar exchange rate, construct models of the processes, and on the basis of these activities make forecasts. She studied the significance of economic indicators influencing the rouble/dollar exchange rate at different times, and developed multi-factor econometric models. In order to reveal the inner structure of the financial indicators and to work out ex-post forecasts for different time intervals, she carried out a series of calculations with the aim of constructing trend-cyclical (TC) and harmonic models, and Box and Jenkins models. She found that: 1. The Russian financial market is dependant on the rouble/dollar exchange rate. Its dynamics are formed under the influence of the short-term state treasury notes and government bonds markets, interbank loans, the rouble/DM exchange rate, the inflation rate, and the DM/dollar exchange rate. The exchange rate is influenced by sales on the Moscow Interbank Currency Exchange and the mechanism of those sales. 2. The TC model makes it possible to conduct an in-depth study of the structure of the processes and to make forecasts of the dynamic changes to currency indicators. 3. The Russian market is increasingly influenced by the world currency market and its prospects are of crucial interest for the world financial community.

Development of Socio-Economic Behaviour and Attitudes of Baltic Nationalities: Perspectives for Integration with Europe

This project is the third stage of a comparative research project, The New Baltic Barometer, which was carried out simultaneously with the "New Democracies Barometer" of the Paul Lazerfeld Society (Vienna) and The Russian Barometer. It studied the opinion and behaviour of the largest Baltic ethnic groups (Estonians, Latvians, Lithuanians). The main focus was on the attitudes of Baltic residents towards the changes in the economic and political system, attitudes towards political values, political trust, and attitudes to the Baltic countries joining the European Union. An analysis of macroeconomic indicators of the Baltic states made it possible to deduce the link between the country's economic development, and satisfaction with the political regime and attitudes towards democratic values. The study analysed the conditions for the democratisation of society, i.e. the development of culture and public opinion in the Baltic states. Attention was also paid to the development of a social network of individuals, showing the transition from informal networks to impersonal institutions. The group concluded that the participation of residents in formal organisations, NGOs in particular, considerably fosters political trust and also increases political efficacy. Participation in formal organisations also reduces the importance of esteem for an authoritarian leader.

Towards a Variety of Family Models: Economic Contributions of Spouses and Family Power

In Western societies the increase in female employment (especially among married women) is seen as having brought about the crisis of the traditional model of the family, reinforcing the position of the "modern" model - the egalitarian family with two working spouses and a "dual-career" family. In contrast, the transitional situation in the post-communist countries during the 1990s is producing a crisis of the family with two working spouses (the basic type of the communist period) and leading to new power relations within the family. While the growth of dual-earner households in this century has implied modification of family models towards greater symmetry of responsibility for breadwinning and homemaking, there is considerable evidence that women's increased employment does not necessarily lead to a more egalitarian approach to gender roles within the family. The group set out to investigate the economic situation of families and economic power within the fame as a crucial factor in the transformation of families with two working spouses in order to reveal the specific patterns of gender contracts and power relations within the family that are emerging in response to the current political and economic transformation. They opted for a comparative approach, selecting the Czech Republic as a country where the very similar tendencies of a few years ago (almost 100% of women employed and the family as a realm of considerable private freedom where both women's and men's gender identities and the traditional distribution of family responsibilities were largely preserved) are combined with a very different experience in terms of economic inequalities during the 1990s to that of Russia. In the first stage of the study they surveyed 300 married couples (150 in each country) on the question of breadwinning. They then carried out in-depth interviews with 10 couples from each country (selected from among the educated layers of the population), focusing on the process of the social construction of gender, using breadwinning and homemaking as gender boundaries which distinguish men from women. By analysing changes in social position and the type of interpersonal interaction of spouses they distinguished two main types of family contracts: the neo-traditional "communal sharing" (with male breadwinner, traditional distribution of family chores and negotiated family power) and the modern one based on negotiated agreement. The most important pre-conditions of husband-wife agreement about breadwinning seemed to imply their overall gender ideology rather than the economic and/or family circumstances. In general, wives were more likely to express egalitarian views, supporting the blurring or even elimination of many gender boundaries. Husbands, on the other hand, more often gave responses calling for the continued maintenance of gender boundaries. The analysis showed that breadwinning is still an important gender boundary in these cultures, one that is assumed unless it is explicitly questioned and that is seen as part of what makes a man a "real man". The majority of respondents seemed to be committed to egalitarian ideology on gender roles and the distribution of family tasks, including decision making, but this is contradicted by the persistent idea of the husband as the breadwinner. This contradiction is more characteristic of the Russian situation than of the Czech. The quantitative study showed a difference in prevailing family models between the two countries, with a clearer shift towards the traditional family contract in the Russian case. The Czechs were more likely to consider their partnerships as based on negotiated agreement, while the Russians saw theirs as based on egalitarian contract, in both cases seeing this as the norm. The majority of couples said they felt satisfied with their marriage, although in both countries wives seemed to be less satisfied. There was however a difference in the issues that aroused dissatisfaction, with Czech women being more sensitive to issues such as self-realisation, personal independence, understanding and recognition in the family, and Russians to issues of love, understanding and recognition. The most disputed area for the majority of families was chores in the home, presumably because in many families both husband and wife were working hard outside the home and because a number of partners had differing views as to the ideal distribution of chores within the family. The distribution of power in the family seems to be linked to the level of well being. The analysis showed that in the dominant democratic model there is still an inverse connection between family leadership and well being: the more prominent the wife's position as head of the family is, the lower the level of family income. This may reflect both the husband's refusal to play the leading role in the family and even his rejection of any involvement in family issues in such a family. The qualitative research revealed that both men and women see the breadwinning role to be an essential part of masculine identity, a role which the female partner would take on temporarily to assist the male but not permanently since this would threaten the gender boundaries and the man's identity. At the same time, few breadwinners expressed a sense of job satisfaction and all considered their choice as imposed on them by the circumstances (i.e. having a family in difficult times). The group feel that family orientation and some loss of personal involvement in their profession is partly reflected in the fact that many of the men felt more comfortable and self-confident at home than at work. Women's work, on the other hand, was largely seen as a source of personal and self-realisation and social life. Eight out of ten of the Russian women interviewed were employed, although only two on a full-time basis, but none saw their jobs as adding substantially to the family budget. Both partners see the most important factor as the wife's wish to work or stay at home, and do not think it wise for the wife to work at the expense of her part of the "family contract", although husbands from the "egalitarian" relationships expressed more willingness to compromise. The analysis showed clearly that wives and husbands did not construct gender boundaries in isolation, with the interviews providing clear evidence of negotiation. At the same time, husbands' interpretations of their wives' employment were less susceptible to the influence of negotiation than were their gender attitudes and norms about breadwinning. One of the most interesting aspects of the spouses' negotiations was the extent to which they disagreed about what they seemed to have agreed upon. Most disagreements about the breadwinning boundaries, however, were over norms and were settled by changes in norms rather than in behavioural interpretation. Changes in norms were often a form of peace offering or were in response in changes in circumstances. The study did show, however, that many of the efforts at cooperation and compensation were more symbolic than real and the group found the plasticity of expressed gender ideology to be one of the most striking findings of their work. They conclude that the shift towards more traditional gednder distributions of incomes and domestic chores does not automatically mean the reestablishment of a patriarchal model of family power. On the contrary, it seems to be a compromise formation, relatively unstable, temporary and containing self-defeating forces as the split between the personal and professional value of work and its social value expressed in a money equivalent cannot be maintained for generations.