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.

Aggressive Behaviour of Different Social and Demographic Groups in Post-Totalitarian Society

The project looked at aggressiveness in different age and social groups of modern post-totalitarian society, beginning with the hypotheses that the greatest risk groups are teenagers and the unemployed, and that there is a link between aggression and the level of meaningfulness of life. The groups studied comprised about 200 persons from urban areas of eastern Ukraine, including schoolchildren, students, white collar workers, self-employed persons, the unemployed and pensioners. Workers in industry were not included as this group has virtually disappeared in Ukraine at present since most enterprises have ceased to work and most workers have moved into the groups of the unemployed or self-employed. Participants were divided into age groups of 13-14, 16-17, 18-22, 24-45, 46-60 and over 60, with each group including approximately equal number of men and women. Research methods included Buss-Darky techniques, the "hand test" (E. Wagner), the "non-existent animal" technique, a Rozenzweig picture frustration study, purpose-in-life tests and an interview. The Buss-Darky test showed that schoolchildren have the highest level of aggression, followed by students. These groups have high indexes in virtually all types of aggression, including its open form. The self-employed have relatively lower indexes, although they are more likely to manifest it openly, while such open manifestations are less likely among white-collar workers, pensioners and the unemployed. The least aggressive were the unemployed and pensioners, although the latter had a relatively high level of hostility. In terms of age, aggression was shown to decrease with age, which Ms. Ivanova attributes to the still imperfect control mechanisms of teenagers and their less mature personalities. Among the younger groups girls showed a slightly higher level of aggression, although this situation was reversed among older people. The risk groups inclined to manifest open forms of aggressiveness can therefore be seen to be teenagers and students. Other tests used show aggressiveness as a feature of the current state, rather than as an inherent feature and the results obtained were somewhat different. In the interviews, all adults referred to the increased aggressiveness in society and most stated that they themselves had become more aggressive and bad-tempered. The ability of individuals to adapt to their social environment was also investigated and schoolchildren turned out to have the lowest adaptation index and the unemployed the highest. MS. Ivanova attributes that latter, rather surprising, result to the fact that the constant frustrations facing the unemployed force them to actively seek ways and means of adapting in order to survive. The final aspect considered was the possible connection between human aggressiveness and the meaningfulness of life. Here the groups with the most meaningful lives were the self-employed and pensioners. The latter result, again rather surprising, was attributed to the desire of people who have already lived the greater part of their lives to place more weight on what they have already done, in order to prove to themselves that they have not lived in vain. The hypothesis that aggressiveness is conversely related to the meaningfulness of life was only partially confirmed. In the two extreme cases (schoolchildren and pensioners) this was indeed the case, but the remaining groups did not show any such connection. From the data obtained, Ms. Ivanova concluded that life in modern post-totalitarian society does indeed foster a rise in people's aggressiveness, and this was supported by the fact that indexes of aggressiveness proved to be higher than the norm. Her original hypothesis as to the groups in society most at risk from open aggression confirmed in the case of teenagers but not of the unemployed, who had relatively low aggressiveness indexes and the highest degree of adaptation.

The Role of the Family in Shaping Self-Concept and Cognitive Styles in Hungary

The project studied the perception of parenting styles and their relation to self-development, cognitive styles, and individualisation in adolescence. Typical parenting styles of mothers and fathers were studied in five different maternal and paternal parenting backgrounds: warm authoritarian, warm democratic, cold neglectful, cold authoritarian, and neutral. Perception of different styles of parenting (for fathers: authority, 'maintaining distance' behaviour, reciprocity, enhancing self-reliance; for mothers: authority, unpredictable behaviour, mutual trust, achievement orientation, and enhancing self-reliance) were analysed in each group using the newly developed Hungarian Parenting Questionnaire (Sallay & Munnich, 1999). This questionnaire has a theoretical basis in the ideas of Harvey (1966, 1967), where the socialisation process is combined with self-development. This categorisation of paternal and maternal parenting backgrounds enabled Sallay to explore and describe in detail how diverse parenting styles contribute to self-development, the development of cognitive complexity, and individualisation. The results show that diverse parenting by mothers and fathers produces differing impacts in nuclear and divorced families and for males and females, taking into consideration such self-components as physical, active, psychological (capabilities, personality, emotions, roles, preferences), social and reflective selves. Cognitive self-complexity varied according to parenting styles and genders: maternal and paternal parenting proved to have the most significant impact on self-complexity in a warm, democratic family. With respect to individualistic tendencies, adolescent boys were most individualistic in a cold, neglectful paternal background in nuclear families as compared to other paternal and maternal family backgrounds and to females.