Performance of incentive contracts in highway PPP projects in Brazil

Private-Public Partnerships (P.P.P.) is a new contractual model institutionalized in 2004 that could be used to remedy to the infrastructure deficit in Brazil. In a context of a principal and agent relation, the public partner goal is to give incentives to the private partner in the contract so that their interests are aligned. This qualitative research presents the findings of an empirical study examining the performance of incentive PPP contracts in Brazil in the highway sector. The goal is to explain how the contracting parties can align their interests in an environment of asymmetric information. Literature identified the factors that can influence PPP design and efficient incentive contracts. The study assesses the contribution of these factors in the building of PPP contracts by focusing on the case of the first and only PPP signed in the highway sector in Brazil which is the MG-050. The first step is to describe the condition of the highway network and the level of compliance of the private partner with the contract PPP MG-050. The second step is to explain the performance of the private partner and conclude if the interests of both partners were aligned in contractual aspects. On the basis of these findings and the analysis of the contract, the study formulates suggestions to improve the draft of PPP contracts from the perspective of the incentive theory of contracts.

Uma análise econômica das mudanças regulatórias no setor de petróleo no Brasil

Esta dissertação analisa o marco regulatório brasileiro do petróleo e gás sob a ótica da Teoria Econômica e faz uma comparação entre o regime de concessão, instituído pela Lei 9.478/97, e o de partilha de produção, adotado após a descoberta do Présal através da Lei 12.351/10. As características do modelo de concessão brasileiro são revistas assim como os resultados obtidos no setor de Exploração e Produção ao longo dos últimos quinze anos. O estudo faz uma abordagem sucinta sobre a descoberta do Pré-sal que ocasionou a alteração do marco regulatório pelo governo brasileiro. Os problemas relacionados à incerteza, poder de incentivo dos contratos, assim como as falhas de mercado relacionadas à assimetria de informação, externalidade e especificidade dos ativos são analisados para ambos os regimes. Ao longo do estudo também são abordadas questões de ordem prática como a insegurança jurídica, o papel da agência reguladora e a mudança do perfil das empresas interessadas em investir no país.

Workplace diversity and incentive contracts : theory and evidence

This paper presents a simple theory of the provision of incentives in firms in which the principal optimally chooses both compensation contracts and the composition of the work force. Assuming that individuals display group loyalty, a less diverse (more homogeneous) work force will be more cooperative. Simple comparative statics provide some testable implications relating risk, diversity and incentive pay. I also analyze the case in which workers’ characteristics cannot be readily observed ex ante. The theory then predicts that firms are more likely to prevent workers from interacting with each other when workers are expected to have similar characteristics. This shows a surprising effect of diversity in the workplace: more diverse firms will promote more interactions between workers of different types, i.e. they will be less segregated. I test the main predictions of the model using a cross-sectional sample of corporate boards. I use the proportion of women on boards as a measure of diversity. There are three main empirical findings: (1) a significant negative correlation between firm risk and diversity, (2) a significant positive relationship between performance-based compensation and diversity and (3) a significant positive correlation between the number of board meetings (a measure of interactions among directors) and diversity. The evidence is broadly consistent with the implications of the theory.

Can water security be achieved in the urban environment through the implementation of the Neo Institutional theory government regulation and legislation?

The research seeks to address the current global water crisis and the built environments effect on the increasing demand for sustainability and water security. The fundamental question in determining the correct approach for water security in the built environment is whether government regulation and legislation could provide the framework for sustainable development and the conscious shift providing that change is the only perceivable option, there is no alternative. This article will attempt to analyse the value of the neo institutional theory as a method for directing individuals and companies to conform to water saving techniques. As is highlighted throughout the article, it will be investigated whether an incentive verse punishment approach to government legislations and regulations would provide the framework required to ensure water security within the built environment. Individuals and companies make certain choices or perform certain actions not because they fear punishment or attempt to conform; neither do they do so because an action is appropriate or feels some sort of social obligation. Instead, the cognitive element of neo institutionalism suggests that individuals make certain choices because they can conceive no alternative. The research seeks to identify whether sustainability and water security can become integrated into all aspects of design and architecture through the perception that 'there is no alternative.' This report seeks to address the omission of water security in the built environment by reporting on a series of investigations, interviews, literature reviews, exemplars and statistics relating to the built environment and the potential for increased water security. The results and analysis support the conclusions that through the support of government and local council, sustainability in the built environment could be achieved and become common practice for developments. Highlighted is the approach required for water management systems integration into the built environment and how these can be developed and maintained effectively between cities, states, countries and cultures.

Social and cultural drivers of incentive effectiveness in infrastructure projects

Formal incentives systems aim to encourage improved performance by offering a reward for the achievement of project-specific goals. Despite argued benefits of incentive systems on project delivery outcomes, there remains debate over how incentive systems can be designed to encourage the formation of strong project relationships within a complex social system such as an infrastructure project. This challenge is compounded by the increasing emphasis in construction management research on the important mediating influence of technical and organisational context on project performance. In light of this challenge, the research presented in this paper focuses on the design of incentive systems in four infrastructure projects: two road reconstructions in the Netherlands and two building constructions in Australia. Based on a motivational theory frame, a cross case analysis is conducted to examine differences and similarities across social and cultural drivers impacting on the effectiveness of the incentive systems in light of infrastructure project context. Despite significant differences in case project characteristics, results indicate the projects’ experience similar social drivers impacting on incentive effectiveness. Significant value across the projects was placed on: varied performance goals and multiple opportunities to across the project team to pursue incentive rewards; fair risk allocation across contract parties; value-driven tender selection; improved design-build integration; and promotion of future work opportunities. However, differences across the contexts were identified. Results suggest future work opportunities were a more powerful social driver in upholding reputation and establishing strong project relationships in the Australian context. On the other hand, the relationship initiatives in the Dutch context seemed to be more broadly embraced resulting in a greater willingness to collaboratively manage project risk. Although there are limitations with this research in drawing generalizations across two sets of case projects, the results provide a strong base to explore the social and cultural influences on incentive effectiveness across different geographical and contextual boundaries in future research.

Incentive compatible mechanisms for group ticket allocation in software maintenance services

A customer reported problem (or Trouble Ticket) in software maintenance is typically solved by one or more maintenance engineers. The decision of allocating the ticket to one or more engineers is generally taken by the lead, based on customer delivery deadlines and a guided complexity assessment from each maintenance engineer. The key challenge in such a scenario is two folds, un-truthful (hiked up) elicitation of ticket complexity by each engineer to the lead and the decision of allocating the ticket to a group of engineers who will solve the ticket with in customer deadline. The decision of allocation should ensure Individual and Coalitional Rationality along with Coalitional Stability. In this paper we use game theory to examine the issue of truthful elicitation of ticket complexities by engineers for solving ticket as a group given a specific customer delivery deadline. We formulate this problem as strategic form game and propose two mechanisms, (1) Division of Labor (DOL) and (2) Extended Second Price (ESP). In the proposed mechanisms we show that truth telling by each engineer constitutes a Dominant Strategy Nash Equilibrium of the underlying game. Also we analyze the existence of Individual Rationality (IR) and Coalitional Rationality (CR) properties to motivate voluntary and group participation. We use Core, solution concept from co-operative game theory to analyze the stability of the proposed group based on the allocation and payments.

An Empirical Examination of the Impacts from Termination of a Performance-Based Incentive Plan

This paper reports on the financial impacts from the termination of a pay for performance plan for the salesforce at a retail establishment. Using monthly panel data spanning more than eight years for 15 outlets of a major retailer, this study documents that store-level sales and operating profits decrease after the incentive plan is terminated. Individual performance data are then investigated to help identify the role of effort and selection effects in explaining the documented decrease. The analysis of the individual employee sales data reveals that virtually all of the declining store level sales can be explained by selection effects.

Toward a Political Theory of Environmental Policy.

This paper makes some steps toward a formal political economy of environmental policy. Economists' quasi-unanimous preferences for sophisticated incentive regulation is reconsidered. First, we recast the question of instrument choice in the general mechanism literature and provide an incomplete contract approach to political economy. Then, in various settings, we show why constitutional constraints on the instruments of environmental policy may be desirable, even though they appear inefficient from a purely standard economic viewpoint.

Incentives and Principles for Individuals in Rawls’s Theory of Justice

Philippe van Parijs (2003) has argued that an egalitarian ethos cannot be part of a post- Political Liberalism Rawlsian view of justice, because the demands of political justice are confined to principles for institutions of the basic structure alone. This paper argues, by contrast, that certain principles for individual conduct—including a principle requiring relatively advantaged individuals to sometimes make their economic choices with the aim of maximising the prospects of the least advantaged—are an integral part of a Rawlsian political conception of justice. It concludes that incentive payments will have a clearly limited role in a Rawlsian theory of justice.

Risk taking of executives under different incentive contracts: experimental evidence

Classic financial agency theory recommends compensation through stock options rather than shares to counteract excessive risk aversion in agents. In a setting where any kind of risk taking is suboptimal for shareholders, we show that excessive risk taking may occur for one of two reasons: risk preferences or incentives. Even when compensated through restricted company stock, experimental CEOs take large amounts of excessive risk. This contradicts classical financial theory, but can be explained through risk preferences that are not uniform over the probability and outcome spaces, and in particular, risk seeking for small probability gains and large probability losses. Compensation through options further increases risk taking as expected. We show that this effect is driven mainly by the personal asset position of the experimental CEO, thus having deleterious effects on company performance.

Isolated capital cities and misgovernance: theory and evidence

Motivated by a novel stylized fact { countries with isolated capital cities display worse quality of governance { we provide a framework of endogenous institutional choice based on the idea that elites are constrained by the threat of rebellion, and that this threat is rendered less e ective by distance from the seat of political power. In established democracies, the threat of insurgencies is not a binding constraint, and the model predicts no correlation between isolated capitals and misgovernance. In contrast, a correlation emerges in equilibrium in the case of autocracies. Causality runs both ways: broader power sharing (associated with better governance) means that any rents have to be shared more broadly, hence the elite has less of an incentive to protect its position by isolating the capital city; conversely, a more isolated capital city allows the elite to appropriate a larger share of output, so the costs of better governance for the elite, in terms of rents that would have to be shared, are larger. We show evidence that this pattern holds true robustly in the data. We also show that isolated capitals are associated with less power sharing, a larger income premium enjoyed by capital city inhabitants, and lower levels of military spending by ruling elites, as predicted by the theory.

Evidence on the incentive optimality of share contracts

Ever since Adam Smith, economists have argued that share contracts do not provide proper incentives. This paper uses tenancy data from India to assess the existence of missing incentives in this classical example of moral hazard. Sharecroppers are found to be less productive than owners, but as productive as fixed-rent tenants. Also, the productivity gap between owners and both types of tenants is driven by sample-selection issues. An endogenous selection rule matches tenancy contracts with less-skilled farmers and lower-quality lands. Due to complementarity, such a matching affects tenants’ input choices. Controlling for that, the contract form has no effect on the expected output. Next, I explicitly model farmer’s optimal decisions to test the existence of non-contractible inputs being misused. No evidence of missing incentives is found.

A Theory of voter experimentation in repeated elections

Nesse artigo, eu desenvolvo e analiso um modelo de dois perí odos em que dois polí ticos competem pela preferência de um eleitor representativo, que sabe quão benevolente é um dos polí ticos mas é imperfeitamente informado sobre quão benevolente é o segundo polí tico. O polí tico conhecido é interpretado como um incumbente de longo prazo, ao passo que o polí tico desconhecido é interpretado como um desa fiante menos conhecido. É estabelecido que o mecanismo de provisão de incentivos inerente às elei cões - que surge através da possibilidade de não reeleger um incumbente - e considerações acerca de aquisi cão de informa cão por parte do eleitor se combinam de modo a determinar que em qualquer equilí brio desse jogo o eleitor escolhe o polí tico desconhecido no per íodo inicial do modelo - uma a cão à qual me refi ro como experimenta cão -, fornecendo assim uma racionaliza cão para a não reelei cão de incumbentes longevos. Especifi camente, eu mostro que a decisão do eleitor quanto a quem eleger no per odo inicial se reduz à compara cão entre os benefí cios informacionais de escolher o polí tico desconhecido e as perdas econômicas de fazê-lo. Os primeiros, que capturam as considera cões relacionadas à aquisi cão de informa cão, são mostrados serem sempre positivos, ao passo que as últimas, que capturam o incentivo à boa performance, são sempre não-negativas, implicando que é sempre ótimo para o eleitor escolher o polí tico desconhecido no per íodo inicial.

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.

The Monotonicity Puzzle: An Experimental Investigation of Incentive Structures

Non-monotone incentive structures, which - according to theory - are able to induce optimal behavior, are often regarded as empirically less relevant for labor relationships. We compare the performance of a theoretically optimal non-monotone contract with a monotone one under controlled laboratory conditions. Implementing some features relevant to real-world employment relationships, our paper demonstrates that, in fact, the frequency of income-maximizing decisions made by agents is higher under the monotone contract. Although this observed behavior does not change the superiority of the non-monotone contract for principals, they do not choose this contract type in a significant way. This is what we call the monotonicity puzzle. Detailed investigations of decisions provide a clue for solving the puzzle and a possible explanation for the popularity of monotone contracts.