Performance-based compensation vs. guaranteed compensation: contractual incentives and performance

Top management from retail banks must delegate authority to lower-level managers to operate branches and service centers. Doing so, they must navigate through conflicts of interest, asymmetric information and limited monitoring in designing compensation plans for such agents. Pursuant to this delegation, the banks adopt a system of performance targets and incentives to align the interests of senior management and unit managers. This paper evaluates the causal relationship between performance-based salaries and managers’ effective performance. We use a fixed effects estimator to analyze an unbalanced panel of data from one of the largest Brazilian retail banks during the period from January 2007 to June 2009. The results indicate that agents with guaranteed variable salary contracts demonstrate inferior performance compared with agents who have performance-based compensation packages. We conclude that there is a moral hazard that can be observed in the behavior of agents who are subject to guaranteed variable salary contracts.

The effects of small firm tax incentives on employment levels

This paper aims to evaluate the impact on employment growth of a tax incentive program targeting Brazilian manufacturing small businesses (SIMPLES). This evaluation is conducted for two distinct periods: for the year 1997, when the program was first implemented, and for the year 1999, when the eligibility rule was modified to allow the eligibility of a broader group of firms. The evaluation takes into account two distinct channels through which the charted effects operate. The first is the employment variation in the firms that became eligible for the incentives, and the second is the change in the survival probability experienced by the same group of firms. Moreover, each of these channels can be activated either by the tax reduction dimension of the program or by its dimension of red tape simplification. Our results identify positive effects on employment growth for the tax incentive program only in the dimension of red tape simplification and its effects on the 1997 sample.

Essays on incentives, procurement and regulation

Esta tese é composta de três artigos. No primeiro artigo, "Simple Contracts under Simultaneous Adverse Selection and Moral Hazard", é considerado um problema de principal-agente sob a presença simultânea dos problemas de risco moral e seleção adversa, em que a dimensão de seleção adversa se dá sobre as distribuições de probabilidade condicionais as ações do agente. No segundo artigo, "Public-Private Partnerships in the Presence of Adverse Selection" é analisada a otimalidade de parcerias público-privadas sob a presença de seleção adversa. No terceiro artigo, "Regulation Under Stock Market Information Disclosure", por sua vez, é considerado o problema da regulação de firmas de capital aberto, onde as firmas possuem incentivos para mandar sinais opostos para o regulador e o mercado.

Mandatory profit sharing, entrepreneurial incentives and capital accumulation

The impact of a mandatory tax on profits which is transferred to workers is analyzed in a general equilibrium entrepreneurial model. In the short run, this distortion reduces the number of fmns and the aggregate output. In the long run, if capital and labor are bad substitutes, it fosters capital accumulation and increases the aggregate output. In a small open economy with free movement of capital, it improves the welfare of the economy's average individual. One concludes that the benefits of sharing schemes may go beyond the short run employment-stabilization goal focused by the profit sharing literature.

Avenues to success : electoral strategies and ambition in the Brazilian chamber of deputies

In the second consecutive election for the Brazilian Chamber ofDeputies, the majority of incumbents (75% in 1998 and again 75% in 2002) decided to run for reelection and at least 70% ofthem in both elections were successful, suggesting thus it would be incorrect to ignore static ambition as the main target of Brazilian legislators. It also raises doubts about the assertion that incumbents use their posts to pursue their post-Iegislative careers. However, this number also suggests that not alIlegislators seek reelection, indicating that it is also incorrect to assume alI of them are driven by similar motivations. In their attempts at career survival, incumbents may also run for higher offices (Senator, Governor, Vicegovernor). A minority still, may run for state leveI offices (regressive ambition).Given that static and progressive ambition are the two main types of career choice in Brazil, we focus on the factors that influence the career decision and electoral success of those who choose to run for reelection and those who choose to run for higher-level offices, i.e. senator and governor. We use data recently colIected from the 2002 elections.

Electoral control in the presence of gridlocks

This article presents a game-theoretic partisan model of voting and political bargaining. In a two-period setup, voters ¯rst elect an executive incumbent and the legislators from a pool of candidates belonging to di®erent parties. Once elected, the executive and the legislature bargain over a budget. Party origin and a relevant parameter of the economy, the state of the world, in°uence the bargaining cost, such that political gridlocks may occur. At the end of the ¯rst period voters observe the outcome of bargaining but do not observe the true estate of the world, and decide whether or not to reelect the same parties for the Executive and the Legislature. The model con¯rms the very recent literature by showing that voters tend to have more °exible reelection criteria when they believe the true state of the world is likely to be unfavorable. On the other hand, when voters believe the true state of the world is likely to be favorable, they become more demanding in order to reelect the incumbents. In particular, there will be government shutdown with positive probability in equilibrium. Gridlocks occur due to the imperfect information of voters and they constitute indeed an information revelation mechanism that improves electoral control in the second period.

Rent dissipation, political viability and the strategic adoption of free trade agreements

This paper studies the political viability of free trade agreements (FTAs). The key element of the analysis is the “rent dissipation” that these arrangements induce: by eliminating intra-bloc trade barriers, an FTA reduces the incentives of the local firms to lobby for higher external tariffs, thereby causing a reduction of the rents created in the lobbying process. The prospect of rent dissipation moderates the governments’ willingness to participate in FTAs; they will support only arrangements that are “substantially” welfare improving, and no FTA that reduces welfare. Rent dissipation also implies that the prospects of political turnover may create strategic reasons for the formation of FTAs. Specifically, a government facing a high enough probability of losing power may want to form a trade bloc simply to “tie the hands” of its successor. An FTA can affect the likelihood of political turnover as well. If the incumbent party has a known bias toward special interests, it may want to commit to less distortionary policies in order to reduce its electoral disadvantage; the rent dissipation effect ensures that an FTA can serve as the vehicle for such a commitment. In nascent/unstable democracies, the incumbent government can use a free trade agreement also to reduce the likelihood of a dictatorial takeover and to “consolidate” democracy – a finding that is consistent with the timing of numerous accessions to and formations of preferential arrangements.

Reelection incentives and political corruption : evidence from Brazil’s municipal audit reports

This paper uses a unique dataset of political corruption, constructed from municipal audit reports obtained from Brazil’s randomized anti-corruption program, to test whether reelection incentives affect the level of rent extraction of incumbent politicians. In order to identify reelection incentives, we use the existence of a term limit in Brazil’s municipal elections. We find that in municipalities where mayors are in their second and final term, there is significantly more corruption compared to similar municipalities where mayors are in their first-term. In particular, in municipalities with second-term mayors there is, on average, R$188,431 more diversion of resources and the incidence of irregularities is 23% higher. We also find more pronounced effects where the costs of rent-extraction are lower (municipalities without media and judicial presence), and the density of pivotal voters is higher (more political competition). Finally, we show that first-term mayors, while less corrupt, have a larger incidence of poor administration suggesting that there may exist a trade-off between corruption and quality in public good provision.

Exposing corrupt politicians : the effects of Brazil's publicly released audits on electoral

This paper examines whether access to information enhances political accountabil- ity. Based upon the results of Brazil's recent anti-corruption program that randomly audits municipal expenditures of federally-transferred funds, it estimates the e®ects of the disclosure of local government corruption practices upon the re-election success of incumbent mayors. Comparing municipalities audited before and after the elections, we show that the audit policy reduced the incumbent's likelihood of re-election by approximately 20 percent, and was more pronounced in municipalities with radio sta- tions. These ¯ndings highlight the value of information and the role of the media in reducing informational asymmetries in the political process.

Evidence on the relationship between incentives and exogenous risk

Theoretical models on moral hazard provide competing predictions on the incentive-risk relationship. These predictions are derived under the assumptions of homogeneous agents and exogenous risk. However, the existing empirical evidence does not account for risk-aversion heterogeneity and risk endogeneity. This paper uses a well-built database on tenancy contracts to address these issues. Detailed information on cropping activities is used to measure the exogenous risk. Risk-aversion heterogeneity and other self-selection problems are addressed through a portfolio schedule and a subsample of farmers who simultaneously own and sharecrop different farms. This controlled exercise finds a direct relation between incentives and exogenous risk.

Optimal water use: is anyone getting the right incentives in California?

This paper discusses ~he widespread inefficiency in water pricing today and uses the State of California as an example. After solving the Planner' s Problem I conclude that water for irrigation should cost more than for domestic use. The optimal price leveI can be calculated from a correct measure of the true marginal cost of supply.

Optimal provision of implicit and explicit incentives in asset management contracts

This paper investigates the importance of the fiow of funds as an implicit incetive provided by investors to portfolio managers in a two-period relationship. We show that the fiow of funds is a powerful incentive in an asset management contract. We build a binomial moral hazard model to explain the main trade-ofIs in the relationship between fiow, fees and performance. The main assumption is that efIort depend" on the combination of implicit and explicit incentives while the probability distrioutioll function of returns depends on efIort. In the case of full commitment, the investor's relevant trade-ofI is to give up expected return in the second period vis-à-vis to induce efIort in the first período The more concerned the investor is with today's payoff. the more willing he will be to give up expected return in the following periods. That is. in the second period, the investor penalizes observed low returns by withdrawing resources from non-performing portfolio managers. Besides, he pays performance fee when the observed excess return is positive. When commitment is not a plausible hypothesis, we consider that the investor also learns some symmetríc and imperfect information about the ability of the manager to generate positive excess returno In this case, observed returns reveal ability as well as efIort choices exerted by the portfolio manager. We show that implicit incentives can explain the fiow-performance relationship and, conversely, endogenous expected return determines incentives provision and define their optimal leveIs. We provide a numerical solution in Matlab that characterize these results.

Transformation of brain drain of brain gain: incentives to attract talented workforce

The key for the future of any country, firm or group lies in the talent, skills, experience, knowledge and capabilities of its people. Migration of human capital resource on an international level depicts the impact on the developing country having its highly educated individuals migrating to developed countries known as “Brain Drain.” Therefore, evaluation of short-term and long-term talent needs and impacts on any country is critical. This paper aims to complement the existing theoretical brain drain and brain gain literature, focusing on the interaction between investment in education, training, healthcare and government to attract highly talented individuals to a developing a country. The migration study is inclusive of the analysis of the highly talented resources that have committed to or are planning to resettle in their developing native countries after investing in themselves through education. The motivational factors of these highly talented individuals are evaluated to determine key needs and drives attracting these individuals back to China from a developed country (aka. reserve migration).

Condicionantes políticos das reformas tributárias na América Latina

Seriam as reformas tributárias condicionadas por fatores políticos? Verificando a escassez de trabalhos empíricos sobre o tema, elaboramos definição própria de reforma tributária e adotamos uma tipologia para esses fenômenos. Em seguida, compilamos a base de dados de reformas tributárias a partir das respostas aos formulários da pesquisa de campo IPES 2006, realizada pelo Banco Interamericano de Desenvolvimento, com apoio do Centro Interamericano de Administrações Tributárias (CIAT). Esses formulários foram preenchidos por funcionários especialistas dos ministérios de finanças latino-americanos, que reportaram reformas entre 1990 e 2004. Depois, construímos os índices de reformas tributárias, que foram utilizados como variáveis dependentes em nossos modelos. Os índices contribuem para o desenvolvimento de estudos quantitativos sobre reformas tributárias, portando flexibilidade para testar diversas hipóteses. Eles tornaram possível analisar separadamente os determinantes das reformas da tributação da renda e do consumo, das reformas gerais e direcionadas, das reformas tendentes a aumentar ou reduzir tributos. Nos testes, destacou-se a influência da lista fechada, indicando que a disciplina parlamentar é importante para aprovar reformas. Em menor número de especificações, foram também relevantes a magnitude distrital, o bicameralismo, o poder de decreto do presidente da república e seu ciclo eleitoral. Não captamos evidência de fatores políticos conjunturais, como a ideologia partidária e maioria do governo no parlamento. Do mesmo modo, a influência dos poderes presidenciais de agenda e veto não se confirmou. O domínio de um partido na coalizão de governo foi relevante somente quando vinculado à lista fechada nas eleições. Em geral, os resultados confirmam o impacto de fatores político-institucionais sobre reformas tributárias, não se observando o mesmo para fatores político-conjunturais. Além disso, foram observadas diferenças nos condicionantes políticos que definem reformas na tributação da renda e do consumo, direcionadas e gerais, expansivas e redutoras (incentivos). O estudo contribui para análise quantitativa dos condicionantes políticos das reformas tributárias na América Latina e fornece dados antes indisponíveis. Oferece evidência empírica, considerando diferentes tipos de reformas e de fatores políticos. O estudo conclui pela necessidade de incorporar as variáveis políticas nas análises que envolvam reformas tributárias, até então marcadas pelo domínio dos argumentos econômicos. Além disso, sugere que o aperfeiçoamento das instituições políticas é importante para melhorar as decisões de política tributária na América Latina.

Accountability and yardstick competition in the public provision of education

This paper explores the institutional change introduced by the public disclosure of an education development index (IDEB, Basic Education Development Index) in 2007 to identify the e ect of education accountability on yardstick competition in education spending for Brazilian municipalities. Our results are threefold. First, political incentives are pervasive in setting the education expenditures. The spatial strategic behavior on education spending is estimated lower for lame-ducks and for those incumbents with majority support at the city council. This suggests a strong relation between commitment and accountability which reinforces yardstick competition theory. Second, we nd a minor reduction (20%) in spatial interaction for public education spending after IDEB's disclosure | compared to the spatial correlation before the disclosure of the index. This suggests that public release of information may decrease the importance of the neighbors` counterpart information on voter`s decision. Third, exploring the discontinuity of IDEB`s disclosure rule around the cut-o of 30 students enrolled in the grade under assessment, our estimates suggest that the spatial autocorrelation | and hence yardstick competition | is reduced in 54%. Finally, an unforeseen result suggests that the disclosure of IDEB increases expenditures, more than 100% according to our estimates.