Personnel economics

Last updated

Personnel economics has been defined as "the application of economic and mathematical approaches and econometric and statistical methods to traditional questions in human resources management". [1] It is an area of applied micro labor economics, but there are a few key distinctions. One distinction, not always clearcut, is that studies in personnel economics deal with the personnel management within firms, and thus internal labor markets, while those in labor economics deal with labor markets as such, whether external or internal. [2] In addition, personnel economics deals with issues related to both managerial-supervisory and non-supervisory workers. [3]


The subject has been described as significant and different from sociological and psychological approaches to the study of organizational behavior and human resource management in various ways. It analyzes labor use, which accounts for the largest part of production costs for most firms, by formulation of relatively simple but generalizable and testable relationships. It also situates analysis in the context of market equilibrium, rational maximizing behavior, and economic efficiency, which may be used for prescriptive purposes as to improving performance of the firm. [4] For example, an alternate compensation package that provided a risk-free benefit might elicit more work effort, consistent with psychologically-oriented prospect theory. [5] But a personnel-economics analysis in its efficiency aspect would evaluate the package as to cost–benefit analysis, rather than work-effort benefits alone. [6]

Personnel economics has its own Journal of Economic Literature classification code, JEL: M5 but overlaps with such labor economics subcategories as JEL: J2, J3, J4, and J5. [7] Subjects treated (with footnoted examples below) include:

History of Personnel Economics

The field can be traced back to 1776 when Adam Smith, a British economist, suggested that within the labor market equilibrium, a trade-off between a worker's wages and non-monetary working conditions could exist. [14] However, Personnel Economics did not gain prominence until 1987, when the Journal of Labor Economics published 10 articles on the field. [14] During the 1990s, Personnel Economics gradually became more empirical-based, whereas previously the field was more heavily theoretical. [15] Personnel Economics is now considered a branch of Labor Economics. In 1998, Edward Lazear described it as "the use of economics to understand the internal workings of the firm." [15] With the availability of new data, the field has evolved to have more practical use. Econometric techniques have played a significant role in the field's development, with data being used to analyze personnel records and other human resource data. This is known as Insider Econometrics. [16]

Theory, Testing, and Possible Uses

Personnel economics began to emerge as a distinct field from a flurry of research in the 1970s that sought to answer the questions of how prices of goods and services traded within a firm are determined. An early difficulty that the subject addressed is possible differences between the interests of an employer considered as wanting cost-free output and employees as wanting cost-free income. [17] The relationship is represented at a general level in the principal-agent problem whose solution is the firm modeled as a set of contracts for efficiently allocating risk and monitoring the performance of the production team and its members. [18] Many questions about wage determination and the relationship between wages and productivity in a firm or government enterprise were raised as a result. The subject was developed in addressing those questions, including examination of pay structure and promotions within hierarchical organizations. [19] [20]

Major theories of the subject developed in the late 1970s and 1980s from the research of Bengt Holmström, [20] Edward Lazear, [21] and Sherwin Rosen [22] to name but a few. Research threads included analysis of:

From the later 1980s, researchers began to forge closer links with experimental economics, including generation of data to test the theories in the field. [26] Other empirical studies conducted then utilized data from sports (e.g. golf tournaments and horse racing). [27] and company records on their suppliers' performances (e.g. raising broiler chickens). [28]

From the 1990s, there was a further surge of empirical tests of the theory from wider availability of personnel records of large companies to researchers and interest in the relation between compensation and productivity [29] and the implications of imperfect labor markets and rent-seeking behavior for the subject. [30]

A retrospective collection of the personnel economics-literature is in Lazear et al., ed. (2004), Personnel Economics, Elgar, with 43 articles dating from 1962 to 2000 (link to contents link here).

Two millennial articles by a contributor to the subject argued in the course of review and assessment to the conclusions that:

Because of the relevance and newly found rigor of personnel analysis, personnel economics should and will become a more important part of the educational curriculum. The field is growing and has a large potential audience, of both students and practitioners. [31]

Gift Exchange Theory

The Gift Exchange Theory, also referred to as the fair-wage theory, applies when employees are provided with better wages than they could receive at another firm in exchange for a higher work standard. [32]

In 1993, a laboratory experiment [33] was conducted to test the effects that the Gift Exchange Theory had on employee effectiveness. Contrary to predictions, it was found that most employers were offering higher (sometimes by more than 100%) than market clearing wages. On average, the higher wage was requited by a higher output, often making it very profitable for employers to offer high wage contracts. Paying for an employee's performance can lead to increased productivity and higher competition surrounding highly skilled workers who will want to work for employers who pay for performance.

Tournament Theory

Tournament Theory was proposed by Edward Lazear and Sherwin Rosen. [25] The theory addresses how pay raises are associated with promotions. The theory’s main point is that promotions are a relative gain. Regarding compensation, the level of compensation must be strong enough to motivate all employees below the level of compensation who aim to be promoted. If the pay spread between promotions is larger, the incentive of employees to put in effort will also be larger. The desired outcome from this would be to see employees performing at a quality and producing a quantity of output that the organization deems desirable. Compensation is also not necessarily determined by the conception of productivity. Employees are promoted based on their relative position within the organization and not by their productivity. However, productivity does hold some weight when considering promotion. [34]

Advantages of Tournament Theory:

Disadvantages of Team Production:

Principal-Agent Problem

The Principal-Agent Problem is based on the relationship between an employer (principal) and an employee (agent). In this case, the employer relies on their employees to maximize the firm’s utility. In practice, incentives are sometimes misaligned between the principal and the agent. This occurs due to differing goals between the two, this can lead to adverse selection for the principal when hiring an agent, they cannot fully evaluate an agent's skills and moral hazard for the agent when presented with more information than the principal. [35]

Approaches to Resolving Conflict

  1. Fixed payment with monitoring [36]
    • Fixed salaries are provided to agents while their performance is under observation. Fixed payment with monitoring is an approach where fixed salaries are given to agents while their performance is being observed. The advantage of this approach is that it reduces the risk of shirking by the agent as their work is being monitored.
    • Disadvantages: Shirking, monitoring costs and adverse selection. However, it also has some disadvantages, such as monitoring costs, adverse selection, and the possibility of an inequitable pay system. The cost of monitoring the agent's work can be expensive, and this may not be feasible for some firms. Additionally, adverse selection may occur as agents may choose to work in firms where their performance is not as heavily monitored. In terms of inequitable pay, fixed payment with monitoring may not always be reasonable as it does not take into account delays or interruptions that may be outside of the agent's control.
  2. Incentive pay without monitoring
    • Payment is correlated with output and performance is not monitored. Incentive pay without monitoring is an approach where payment is correlated with output, and performance is not monitored. This approach allows for greater flexibility, but it also has some disadvantages, such as shirking and inequitable pay. As the agent's pay is directly correlated with their output, there is a greater incentive for the agent to perform well.
    • Disadvantages: Inequitable pay and compensation. However, without monitoring, there is a risk of shirking, where the agent may not act in the best interest of the principal/firm. Additionally, an inequitable pay system may arise if delays or interruptions occur, and the agent is still expected to produce the same amount of output.

Shirking: If agents are guaranteed pay, they may lack the motivation to act in the best interest of the principal/firm. This can lead to the agent not performing at the expected level or engaging in behavior that is not aligned with the principal's goals.

Monitoring Costs: Monitoring and measuring agent performance can be costly for the principal, as it requires additional resources and time. The costs associated with monitoring can also be a disincentive for the principal to invest in monitoring, leading to a lack of oversight and potential issues with agent behavior.

Adverse Selection: If the principal heavily monitors and controls agent behavior, highly skilled agents may choose to work elsewhere where their skills are better appreciated and they have more autonomy. This can result in the principal being left with lower quality agents who are willing to work under these conditions.

Inequitable Pay: Fixed payment with monitoring can be prone to delays and interruptions, making it unreasonable to punish agents for issues outside of their control. This can lead to inequitable pay and compensation for agents who are performing well but face delays or interruptions. Additionally, incentive pay without monitoring can lead to inequitable pay if the correlation between output and pay is not properly calibrated.

Compensation: Compensation is an approach where the principal may have to provide agents with a risk premium as they bear a risk with payment. This approach acknowledges that agents take on some risk in their work and may need to be compensated accordingly. However, this approach may not always be feasible as it may increase the costs for the principal/firm.

Team Production

In modern times, firms have increasingly adopted team production instead of pursuing individual production. [37] Team production is a form of production where a group of individuals with complementary skills work together to produce a final product. This approach offers several advantages and disadvantages.

Advantages of Team Production:

One of the key advantages of team production is that it can be more productive than individual production. Work can be distributed between employees based on each of their specific skill sets, which makes the overall process more efficient. Many projects require a wide variety of skill sets, and it is unlikely that one individual will have all the required skills to complete the project by themselves. By working in a team, members with complementary skill sets can benefit from each other, allowing for more efficiency in the project.

Teamwork offers different perspectives, and each member may have a different way of handling the project. By sharing ideas, teams can produce better quality work than if the project was done by an individual. Furthermore, it is easier for firms to hire people with less skill, each specialising in a few skills than hiring an individual with a wide variety of skills. This approach is more cost-effective as individuals with a high skill set are more expensive to hire.

Disadvantages of Team Production:

Despite the benefits, team production has its disadvantages. The time it takes to organise teams and have them cooperate can be time-consuming. Additionally, there is a potential risk of having a free-rider problem, where individuals within a team can get away with no contribution to the work and still be compensated the same amount as their peers. [37]

However, free-riding can be eliminated by organising set protocols. This allows for easier communication and decision-making, giving each member of the team responsibilities and requirements that are agreed upon. Punishing free-riders is another way to deter them from repeating the offence. [38]

In conclusion, even though free-riding is an issue when working as a team, the benefits may outweigh the potential disadvantages. [38] Team production is suitable for many projects that require a variety of skill sets, and it enables firms to produce high-quality work while remaining cost-effective. Additionally, teamwork offers a chance for individuals to learn from each other and develop new skills, leading to better job satisfaction and morale.

Pay Compression

Pay Compression refers to a situation where wage or salary levels are indistinguishable between long-term employees and newly hired employees, and this issue develops over time. If left unresolved, organisations run the risk of turnover as long-term employees may feel undervalued and start looking for work elsewhere. However, a certain degree of pay compression may lead to an efficient market outcome.

Organisations with a team-based work environment may consider a certain degree of pay compression. This would make equity more relevant in close comparisons, [34] boost morale and worker efficiency, and provide insurance to employees during uncertain outcomes, such as bad market conditions. However, pay compression leaves employees vulnerable to moral hazard problems, and they may put less effort into their work.

According to the Tournament Theory, employees may improve their image not only by making themselves look better but also by making their rivals look worse. Pay being based on relative performance may cause some issues within the workplace, as co-workers will be less likely to cooperate with each other if there is an opportunity to outshine each other. Pay compression can help in this case by closing the salary gap between job levels, which in turn gives less incentive for employees to sabotage their co-workers. [39]

It is important to note that pay compression is not a one-size-fits-all solution, and organisations must carefully consider the potential benefits and drawbacks before implementing it. In some cases, pay compression may lead to turnover or reduced effort, while in others, it may lead to increased morale and productivity. By analysing their specific situation and goals, organisations can determine whether pay compression is a viable solution for their compensation issues.

Hedonic Model of Compensation

The Hedonic Model of Compensation is a method used to estimate the value of compensation for a worker beyond just their wage or salary. This model is based on the revealed preference theory, which states that individuals reveal their preferences through their choices. Employees value aspects such as flexible work hours, a comfortable working environment, health insurance and pension benefits, and recognition and mentoring from bosses, in addition to monetary compensation.

The Hedonic Model helps firms to strike a balance between costs and benefits, with the goal of offering the best mixed package of pay and benefits to entice workers. The final package is determined by the preferences of the employees, the cost structure of the firm, and the firm's desire to hire employees.

The model also predicts that there is a negative trade-off between wages and "positive" job attributes, such as a desirable work location or enjoyable working environment. Each firm offers the benefits that attract its most valued type of worker, and while these benefits are costly for the firm, they can also boost productivity. [40]

Older workers tend to favour health insurance or pension benefits more than younger workers, [40] and the Hedonic Model can help firms to design compensation packages that cater to the preferences of different employee segments. By understanding what employees value beyond just their wage or salary, firms can create more tailored and attractive compensation packages that help to attract and retain high-quality talent.

Human Resource Practices in Personnel Economics

Human Resource Practices in Personnel Economics refer to the methods and techniques that firms use to manage their workforce. Over time, the HR practices have evolved to focus more on teamwork and incentive pay. However, not all firms have been successful in implementing these changes. The success of a new practice depends on its complementarity with other practices. Firms run the risk of not reaching optimal output if they choose to adopt only one or two practices. [41]

Complementary practices refer to a set of HR practices that work in tandem with each other to produce better results. For instance, a firm that adopts a system of teamwork, incentive pay, and training is likely to perform better than a firm that only adopts one or two of these practices. Economists and non-economists alike acknowledge the importance of complementary practices in HR management. [42]

Studies have shown that firms that adopt a complementary set of practices are more productive than those that adopt a limited set. For example, a study conducted by Ichniowski, Shaw, and Prennushi in 1997 found that steel mills that used a complementary set of practices were substantially more productive than those that used a limited set. [43]

In conclusion, the success of HR practices depends on their complementarity with other practices. Firms that adopt a complementary set of practices are likely to be more productive than those that adopt only one or two practices. This emphasises the need for firms to consider a set of practices over an individual practice when implementing new HR practices.

Motivation-enhancing HR practices

In human resource management, organisations use two types of practices: skill-enhancing practices and motivation-enhancing practices. Motivation-enhancing practices are designed to motivate and engage employees in order to improve their performance and productivity. [44]

The following are some motivation-enhancing practices that organisations commonly use:

  • Performance pay vs. fixed pay
    • Performance Pay: Pay based on the performance of the worker. This is a type of compensation that is based on the performance of the worker. Employees receive pay based on how well they perform their duties and responsibilities.
    • Fixed Pay: Pay that is fixed for all workers. This is a type of compensation where the pay is fixed for all workers, regardless of their performance.
  • Close supervision vs. freedom and trust
    • Close Supervision: Work is monitored and closely reviewed. This is where work is closely monitored and reviewed by managers or supervisors.
    • Freedom and Trust: Workers are less monitored and have more freedom. This is where workers are given more freedom to work on their own and are trusted to complete their tasks without close supervision.
  • Reward seniority vs. reward (comparative) performance
    • Reward Seniority: Benefits for staying with a company in the long-term.This is where benefits are given to employees who have been with the company for a long time. The longer they have worked for the company, the more benefits they receive.
    • Reward Performance: Rewarded on the basis of performance, rather than seniority. This is where employees are rewarded based on their performance and achievements, rather than their seniority.
  • Job security (tenure) vs. competitive selection
    • Job Security: Insured a secure long-term job regardless of performance. This is where employees are guaranteed job security regardless of their performance.
    • Competitive Selection: Workers compete for jobs, under-performing workers are likely to be let go and over-achieving workers stay. This is where workers compete for jobs and those who underperform are likely to be let go, while those who overachieve stay.
  • Intrinsic motivation vs. extrinsic rewards
    • Intrinsic Motivation: Appreciation of the work employees produce, motivation to work harder.This is where employees are motivated by their own interest and enjoyment in their work, rather than by external rewards.
    • Extrinsic Rewards: Monetary rewards for producing high quality work. This is where employees are motivated by external rewards, such as bonuses or promotions.
  • Benefits and entitlements vs. additional pay
    • Benefits and Entitlements: Compensation in the form of non-monetary payment, e.g., insurance, pension, etc. This is where compensation is given to employees in the form of non-monetary payment, such as insurance or pension plans.
    • Additional Pay: Compensation in the form of monetary payment. This is where compensation is given to employees in the form of monetary payment, such as bonuses or pay raises.

Skill-enhancing HR practices

Skill-enhancing HR practices refer to policies, practices, and procedures used to enhance the knowledge, skills, and competencies of employees. Organisations use skill-enhancing practices to increase the productivity and effectiveness of their employees. Here are some examples of skill-enhancing HR practices:

  • Staff development programs vs. Peer training
    • Staff development programs: Staff development programs refer to policies and practices used to develop the knowledge, skills, and competencies of staff. These programs can be in the form of workshops, seminars, and training sessions. [45]
    • Peer training: Peer training is a process of enhancing skills through interactions with peers. Peer training can be formal or informal, and it involves learning from colleagues who have the desired skills. [46]
  • Hiring for talent vs. Hiring for experience
    • Hiring for talent: When hiring new employees, organisations can either focus on talent or experience. Hiring for talent involves selecting new employees based on their innate ability, interest, and motivation towards a particular type of work.
    • Hiring for experience: Hiring for experience involves selecting new employees based on their previous experience in a similar position.
  • Promoting diversity vs. Focusing on 'merit'
    • Promoting diversity: Organisations can choose to promote diversity or focus on merit when hiring new employees. Promoting diversity involves expanding the scope of the company in terms of individual differences such as race, gender, age, religion, and nationality. [47]
    • Focus on merit: Focusing on merit involves selecting individuals who are most deserving based on their performance.

See also


  1. • Edward Lazear, 2008. "personnel economics," The New Palgrave Dictionary of Economics , 2nd Edition, v. 6, p. 380 [pp. 380–84]. Abstract.
       • _____ and Kathryn L. Shaw, 2007. "Personnel Economics: The Economist's View of Human Resources," Journal of Economic Perspectives, 21(4), pp. 91–114.
  2. Edward P. Lazear and Paul Oyer, 2004. "Internal and External Labor Markets: A Personnel Economics Approach," Labour Economics, 11(5), pp. 527–554 Archived 1 February 2014 at the Wayback Machine .
  3. Above text adapted from JEL Classification Codes Guide: M per JEL:M5.
  4. • Edward Lazear, 2008. "personnel economics," The New Palgrave Dictionary of Economics, 2nd Edition, v. 6, pp. 381, 383. Abstract.
       • _____, 2000a. "Economic Imperialism," Quarterly Journal of Economics, 115(1), pp. 99–100 & 119–22 pp. 99–146.
  5. Daniel Kahneman and Amos Tversky, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, 47(2), pp. 263–292.
  6. Edward Lazear, 2008. "personnel economics," The New Palgrave Dictionary of Economics, 2nd Edition, v. 6, p. 381. Abstract.
  7. JEL Classification Codes Guide: M per JEL:M5.
  8. Jed DeVaro, 2005. "Employer Recruitment Strategies and the Labor Market Outcomes of New Hires," Economic Inquiry, 43(2), pp. 263–82. Abstract.
  9. Harald Dale-Olsen, 2006. "Wages, Fringe Benefits and Worker Turnover," Labour Economics, 13(1), pp. 87–105. Abstract.
  10. Filipe Almeida-Santos and Karen Mumford, 2005. "Employee Training and Wage Compression in Britain," Manchester School, 3(3), pp. 321-42.
  11. Stephen J. Deery and Roderick D. Iverson, 2005. "Labor-Management Cooperation: Antecedents and Impact on Organizational Performance," Industrial and Labor Relations Review, 58(4), pp. 588–609.
  12. Axel Engellandt and Regina T. Riphahn, 2005. "Temporary Contracts and Employee Effort," Labour Economics, 12(3), pp. 281–99. Abstract.
  13. Above text and footnoted examples are from JEL Classification Codes Guide M5.
  14. 1 2 Grund, Christian; Bryson, Alex; Dur, Robert; Harbring, Christine; Koch, Alexander K.; Lazear, Edward P. (16 January 2017). "Personnel economics: A research field comes of age". German Journal of Human Resource Management: Zeitschrift für Personalforschung. 31 (2): 101–107. doi: 10.1177/2397002216684998 . ISSN   2397-0022. S2CID   115407646.
  15. 1 2 Lazear, Edward (1999). "Personnel Economics: Past Lessons and Future Directions Presidential Address to the Society of Labor Economists, San Francisco, May 1, 1998". Journal of Labor Economics. 17 (2): 199–236. doi:10.1086/209918. ISSN   0734-306X. S2CID   154386072.
  16. The handbook of organizational economics. Gibbons, Robert, 1958-, Roberts, John, 1945 February 11-. Princeton, N.J.: Princeton University Press. 2013. pp. 263–312. ISBN   978-1-4008-4535-4. OCLC   892969634.{{cite book}}: CS1 maint: others (link)
  17. Edward Lazear, 2008. "personnel economics," The New Palgrave Dictionary of Economics, 2nd Edition, v. 6, p. 381 [pp. 380–84]. Abstract.
  18. Stephen A. Ross 1973. "The Economic Theory of Agency: The Principal's Problem," American Economic Review, 63(2), pp. 134–139.
      Eugene F. Fama, 1980. "Agency Problems and the Theory of the Firm," Journal of Political Economy, 88(2), pp. 288–307.
  19. Joseph E. Stiglitz, 1975. "Incentives, Risk, and Information: Notes Towards a Theory of Hierarchy," Bell Journal of Economics, 6(2), pp. 552-579.
      James A. Mirrlees, 1976.The Optimal Structure of Incentives and Authority within an Organization,"Bell Journal of Economics, 7(1) pp. 105–131.
      Abram Bergson, 1978. "Managerial Risks and Rewards in Public Enterprises," Journal of Comparative Economics, 2(3), pp. 211–225. Abstract.
       • Morley Gunderson, 2001. "Economics of Personnel and Human Resource Management," Human Resource Management Review, 11(4), pp. 431–452.
       • Debra J. Aron, 1990. "Firm Organization and the Economic Approach to Personnel Management," American Economic Review, 80(2), pp. 23-27.
       • Michael Gibbs and Alec Levenson, 2002. "The Economic Approach to Personnel Research," ch. 6, in S. Grossbard-Shechtman and C. K. Clague, ed., The Expansion of Economics: Toward a more Inclusive Social Science, M.E. Sharpe. pp. 99- 133.
  20. 1 2 3 • Bengt Holmström , 1979. "Moral Hazard and Observability," Bell Journal of Economics, 10(1), pp. 74–91.
       • _____, 1982. "Moral Hazard in Teams," Bell Journal of Economics, 13(2), 324–340.
       • _____, 1983. "Equilibrium Long-Term Labor Contracts," Quarterly Journal of Economics, 98(Supplement), pp. 23-54.
       • _____, 1999. "Managerial Incentive Problems: A Dynamic Perspective," Review of Economic Studies, 66(1), 169–182.
       • _____, 1994. "The Firm as an Incentive System," American Economic Review, 84(4), pp. 972–991.
       • _____ and Paul Milgrom, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics, and Organization, 7(special issue), 24–52 Archived 25 April 2012 at the Wayback Machine .
  21. • Edward Lazear, 1979. "Why Is There Mandatory Retirement?" Journal of Political Economy, 87(6), pp. 1261-1284.
       • _____, 1981. "Agency, Earnings Profiles, Productivity, and Hours Restrictions," American Economic Review, 71(4), pp. 606-620.
       • _____, 1986. "Salaries and Piece Rates," Journal of Business, 59(3), pp. 405-431.
       • _____, 1987. "incentive contracts," The New Palgrave: A Dictionary of Economics , v. 2, pp. 744–48. Table of Contents link.
       • _____ 1995. Personnel Economics. MIT. Arrow-page searchable contents.
       • _____, 1999. "Personnel Economics: Past Lessons and Future Directions," Journal of Labor Economics, 17(2), pp. 199–236. (Presidential address to the Society of Labor Economists.)
       • _____, 2000a. "Economic Imperialism," Quarterly Journal of Economics, 115(1), pp. 119–22 [pp. 99–146.
       • _____, 2000b. "The Future of Personnel Economics," Economic Journal, 110(467), pp. F611-F639.
       • _____, 2000c. "Performance Pay and Productivity," American Economic Review, 90(5), pp. 1346–1361.
       • _____, 2008. "personnel economics," The New Palgrave Dictionary of Economics. 2nd Edition. Abstract.
       • _____ and Michael Gibbs, 2009. 2nd ed. Personnel Economics in Practice, Wiley. Description and preview.
       • Edward Lazear and Kathryn L. Shaw, 2007. "Personnel Economics: The Economist's View of Human Resources," Journal of Economic Perspectives, 21(4), pp. 91–114.
       • Edward Lazear and Paul Oyer, 2009. "Personnel Economics," draft of chapter to appear in R. Gibbons and D. J. Roberts, ed., 2013,Handbook of Organizational Economics, Princeton University Press.
  22. • Sherwin Rosen 1978. "Substitution and Division of Labour," Economica, 45(179), pp. 235–250.
       • _____, 1982. "Authority, Control, and the Distribution of Earnings," Bell Journal of Economics, 13(2), pp. 311-323.
       • _____, 1986a. "The Theory of Equalizing Differences," ch. 12, O. C. Ashenfelter and R. Layard, ed. Handbook of Labor Economics, v. 1 , Elsevier, pp. 641-692.
       • _____, 1986b. "Prizes and Incentives in Elimination Tournaments," American Economic Review, 76(4), pp. 701-715.
  23. Edward Lazear, 1986. "Salaries and Piece Rates," Journal of Business, 59(3), pp. 405-431.
  24. Robert Gibbons, 1987. "Piece-Rate Incentive Schemes," Journal of Labor Economics, 5(4, Part 1), pp. 413–429.
  25. 1 2 • Edward P. Lazear and Sherwin Rosen, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, 89(5), pp. 841–864.
       • Sherwin Rosen, 1986b. "Prizes and Incentives in Elimination Tournaments," American Economic Review, 76(4), pp. 701-715.
  26. • Clive Bull, Andrew Schotter, and Keith Weigelt, 1987. "Tournaments and Piece Rates: An Experimental Study," Journal of Political Economy, 95(1), pp. "Tournaments-and-Piece-Rates-An-Experimental-Study".pdf 1–33.
       • Edward L. Deci, Richard Koestner, and Richard M. Ryan, 1999. "A Meta-Analytic Review of Experiments Examining the Effects of Extrinsic Rewards on Intrinsic Motivation," Psychological Bulletin, 125(6), pp. 627–668.
       • Daniel S. Nagin, James B. Rebitzer, Seth Sanders, and Lowell J. Taylor, 2002. "Monitoring, Motivation, and Management: The Determinants of Opportunistic Behavior in a Field Experiment," American Economic Review, 92(4), pp. 850–873.
       • Bruce Sheare, 2004. "Piece Rates, Fixed Wages and Incentives: Evidence from a Field Experiment," Review of Economic Studies,71(2), pp. 513–534.
      Oriana Bandiera, Iwan Barankay, and Imran Rasul, 2007. "Incentives for Managers and Inequality Among Workers: Evidence from a Firm Level Experiment," Quarterly Journal of Economics, 122(2), pp. 729–773.
  27. Ronald G. Ehrenberg and Michael L. Bognanno, 1990. "Do Tournaments Have Incentive Effects?" Journal of Political Economy, 98(6), pp. 1307–1324.
       • Sue Fernie and David Metcalf, 1999. "It's Not What You Pay It's the Way that You Pay it and That's What Gets Results: Jockeys’ Pay and Performance," LABOUR, 13(2), pp. 385–411.
  28. Charles R. Knoeber and Walter N. Thurman, 1994. "Testing the Theory of Tournaments: An Empirical Analysis of Broiler Production," Journal of Labor Economics, 12(2), pp. 155-179.
  29. • Edward Lazear, 2008. "personnel economics," The New Palgrave Dictionary of Economics , 2nd Edition, v. 6, pp. 380–84. Abstract.
       • Paul Oyer and Scott Schaefer, 2011. "Personnel Economics: Hiring and Incentives," ch. 20, Handbook of Labor Economics, v. 4B, pp. 1769–1823. Abstract and pre-pub PDF.
       • Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, 37(1), pp. 7–63.
       • _____, 2008. "contracting in firms," The New Palgrave Dictionary of Economics, Second Edition, Abstract and pre-pub PDF.
      Michael C. Jensen, and Kevin J. Murphy, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, 98(2), pp. 225–264.
       • George Baker, Michael Gibbs, and Bengt Holmstrom, 1994a. "The Internal Economics of the Firm: Evidence from Personnel Data," Quarterly Journal of Economics, 109(4), pp. 881-919.
       • _____, 1994b. "The Wage Policy of a Firm," Quarterly Journal of Economics, 109(4), pp. 921-955.
       • Andrew D. Foster and Mark R. Rosenzweig, 1994. "A Test for Moral Hazard in the Labor Market: Contractual Arrangements, Effort, and Health," Review of Economics and Statistics, 76(2), pp. 213-227.
       • Robert Drago and Gerald T. Garvey, 1998. "Incentives for Helping on the Job: Theory and Evidence," Journal of Labor Economics, 16(1), pp. 1–25.
       • Casey Ichniowski, Kathryn L. Shaw, and Giovanna Prennushi, 1997. "The Effects of Human Resource Management Practices on Productivity: A Study of Steel Finishing Lines," American Economic Review, 87(3), pp. 291–313.
       • Brent Boning, Casey Ichniowski, and Kathryn Shaw, 2007. "Opportunity Counts: Teams and the Effectiveness of Production Incentives," Journal of Labor Economics, 25(4), pp. 613–650. doi : 10.1086/519539.
      Ann Bartel, Casey Ichniowski, and Kathryn Shaw, 2007. "How Does Information Technology Affect Productivity? Plant-Level Comparisons of Product Innovation, Process Improvement, and Worker Skills," Quarterly Journal of Economics, 122(4), pp. 1721–1758.
       • Tor Eriksson and Mette Lauste, 2000. "Managerial Pay and Firm Performance: Danish Evidence," Scandinavian Journal of Management, 16(3), pp. 269–286.
       • Paul Oyer, 2004. "Why Do Firms Use Incentives That Have No Incentive Effects?" Journal of Finance, 59(4), pp. 1619–1650.
       • Paul Oyer and Scott Schaefer, 2005. "Why Do Some Firms Give Stock Options to All Employees?: An Empirical Examination of Alternative Theories," Journal of Financial Economics, 76(1), pp. 99–133.
  30. • Pietro Garibaldi, 2006. Personnel Economics in Imperfect Labour Markets, Oxford. Description and preview.
       • Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, 37(1), pp. 31–32, 39. [pp. 7–63.
       • Canice Prendergast and Robert H. Topel, 1993. "Discretion and Bias in Performance Evaluation," European Economic Review, vol. 37, issue 2–3, pages 355–365.
  31. Edward P. Lazear, 1999. "Personnel Economics: Past Lessons and Future
  32. Fehr, E; Gächter, S (1990). ""Fairness and Retaliation: The Economics of Reciprocity"". The Journal of Economic Perspectives. 14 (3): 159–182. doi: 10.1257/jep.14.3.159 .
  33. Fehr, E; Gächter, S (1990). ""Fairness and Retaliation: The Economics of Reciprocity"". The Journal of Economic Perspectives. 14 (3): 159–182. doi: 10.1257/jep.14.3.159 .
  34. 1 2 Lazear, Edward; Shaw, Kathryn (2007). "Personnel Economics: The Economist's View of Human Resources". Journal of Economic Perspectives. Cambridge, MA. doi: 10.3386/w13653 .
  35. Eisenhardt, Kathleen M. (1989). "Agency Theory: An Assessment and Review". The Academy of Management Review. 14 (1): 57–74. doi:10.2307/258191. ISSN   0363-7425. JSTOR   258191.
  36. Miller, Gary J. (2005), "Solutions to Principal-Agent Problems in Firms", Handbook of New Institutional Economics, Berlin/Heidelberg: Springer-Verlag, pp. 349–370, doi:10.1007/0-387-25092-1_15, ISBN   1-4020-2687-0 , retrieved 1 November 2020
  37. 1 2 Lazear, Edward; Shaw, Kathryn (2007). "Personnel Economics: The Economist's View of Human Resources". Journal of Economic Perspectives. Cambridge, MA. doi: 10.3386/w13653 .
  38. 1 2 Carpenter, Jeffrey; Bowles, Samuel; Gintis, Herbert; Hwang, Sung-Ha (2009). "Strong reciprocity and team production: Theory and evidence". Journal of Economic Behavior & Organization. 71 (2): 221–232. doi:10.1016/j.jebo.2009.03.011. ISSN   0167-2681.
  39. Lazear, Edward P. (1989). "Pay Equality and Industrial Politics". Journal of Political Economy. 97 (3): 561–580. doi:10.1086/261616. ISSN   0022-3808. S2CID   153565764.
  40. 1 2 Lazear, Edward; Shaw, Kathryn (2007). "Personnel Economics: The Economist's View of Human Resources". Journal of Economic Perspectives. Cambridge, MA. doi: 10.3386/w13653 .
  41. Schmidt, Reinhard H. (2000). "James N. Baron/David M. Kreps, Strategic Human Resources: Frameworks for General Managers, John Wiley & Sons, Inc., New York et al. 1999, 602 pages, $ 71.00". Schmalenbach Business Review. 52 (4): 406–407. doi:10.1007/BF03396627. ISSN   1439-2917. S2CID   165855142.
  42. Austin, Barbara (1994). "Competitive advantage through people unleashing the power of the work force. Jeffrey Pfeffer, Harvard Business School Press, Boston, 1994". Journal of Organizational Behavior. 15 (6): 575–576. doi:10.1002/job.4030150608. ISSN   0894-3796.
  43. Ichniowski, Casey; Shaw, Kathryn; Prennushi, Giovanna (1997). "The Effects of Human Resource Management Practices on Productivity". The American Economic Review. Cambridge, MA. doi: 10.3386/w5333 .
  44. Hamel, Gregory. "The Pros & Cons of Employee Pay Being Fixed Vs. Variable & Dependent on Performance". Chron.
  45. University of York. "Staff Development".
  46. McNamara, MBA, PHD, Carter (18 January 2022). "What is Peer Learning?".{{cite web}}: CS1 maint: multiple names: authors list (link)
  47. A Piggott, Damani; Cariaga-Lo, Liza. "Promoting Inclusion, Diversity, Access, and Equity Through Enhanced Institutional Culture and Climate". The Journal of Infectious Diseases.

Related Research Articles

<span class="mw-page-title-main">Labour economics</span> Study of the markets for wage labour

Labour economics, or labor economics, seeks to understand the functioning and dynamics of the markets for wage labour. Labour is a commodity that is supplied by labourers, usually in exchange for a wage paid by demanding firms. Because these labourers exist as parts of a social, institutional, or political system, labour economics must also account for social, cultural and political variables.

<span class="mw-page-title-main">Peter principle</span> Management concept by Laurence J. Peter

The Peter principle is a concept in management developed by Laurence J. Peter, which observes that people in a hierarchy tend to rise to "a level of respective incompetence": employees are promoted based on their success in previous jobs until they reach a level at which they are no longer competent, as skills in one job do not necessarily translate to another.

In economics, the means of production is a term which describes land, labor, and capital that can be used to produce products ; however, the term can also refer to anything that is used to produce products. It can also be used as an abbreviation of the "means of production and distribution" which additionally includes the logistical distribution and delivery of products, generally through distributors; or as an abbreviation of the "means of production, distribution, and exchange" which further includes the exchange of distributed products, generally to consumers.

From a legal point of view, a contract is an institutional arrangement for the way in which resources flow, which defines the various relationships between the parties to a transaction or limits the rights and obligations of the parties.

<span class="mw-page-title-main">Incentive</span> Something that motivates individuals to perform

In general, incentives are anything that persuade a person to alter their behaviour in the desired manner. It is emphasised that incentives matter by the basic law of economists and the laws of behaviour, which state that higher incentives amount to greater levels of effort and therefore higher levels of performance.

Productivity is the efficiency of production of goods or services expressed by some measure. Measurements of productivity are often expressed as a ratio of an aggregate output to a single input or an aggregate input used in a production process, i.e. output per unit of input, typically over a specific period of time. The most common example is the (aggregate) labour productivity measure, one example of which is GDP per worker. There are many different definitions of productivity and the choice among them depends on the purpose of the productivity measurement and data availability. The key source of difference between various productivity measures is also usually related to how the outputs and the inputs are aggregated to obtain such a ratio-type measure of productivity.

Managerial economics is a branch of economics involving the application of economic methods in the organizational decision-making process. Economics is the study of the production, distribution, and consumption of goods and services. Managerial economics involves the use of economic theories and principles to make decisions regarding the allocation of scarce resources. It guides managers in making decisions relating to the company's customers, competitors, suppliers, and internal operations.

<span class="mw-page-title-main">Principal–agent problem</span> Conflict of interest when one agent makes decisions on anothers behalf

The principal–agent problem refers to the conflict in interests and priorities that arises when one person or entity takes actions on behalf of another person or entity. The problem worsens when there is a greater discrepancy of interests and information between the principal and agent, as well as when the principal lacks the means to punish the agent. The deviation from the principal's interest by the agent is called "agency costs".

The term efficiency wages was introduced by Alfred Marshall to denote the wage per efficiency unit of labor. Marshallian efficiency wages would make employers pay different wages to workers who are of different efficiencies such that the employer would be indifferent between more-efficient workers and less-efficient workers. The modern use of the term is quite different and refers to the idea that higher wages may increase the efficiency of the workers by various channels, making it worthwhile for the employers to offer wages that exceed a market-clearing level. Optimal efficiency wage is achieved when the marginal cost of an increase in wages is equal to the marginal benefit of improved productivity to an employer.

Shareholder value is a business term, sometimes phrased as shareholder value maximization. It became prominent during the 1980s and 1990s along with the management principle value-based management or "managing for value".

The theory of the firm consists of a number of economic theories that explain and predict the nature of the firm, company, or corporation, including its existence, behaviour, structure, and relationship to the market. Firms are key drivers in economics, providing goods and services in return for monetary payments and rewards. Organisational structure, incentives, employee productivity, and information all influence the successful operation of a firm in the economy and within itself. As such major economic theories such as Transaction cost theory, Managerial economics and Behavioural theory of the firm will allow for an in-depth analysis on various firm and management types.

An agency cost is an economic concept that refers to the costs associated with the relationship between a "principal", and an "agent". The agent is given powers to make decisions on behalf of the principal. However, the two parties may have different incentives and the agent generally has more information. The principal cannot directly ensure that its agent is always acting in its best interests. This potential divergence in interests is what gives rise to agency costs.

Performance-related pay or pay for performance, not to be confused with performance-related pay rise, is a salary or wages paid system based on positioning the individual, or team, on their pay band according to how well they perform. Car salesmen or production line workers, for example, may be paid in this way, or through commission.

<span class="mw-page-title-main">Edward Lazear</span> American economist and academic (1948–2020)

Edward Paul Lazear was an American economist, the Morris Arnold and Nona Jean Cox Senior Fellow at the Hoover Institution at Stanford University and the Davies Family Professor of Economics at Stanford Graduate School of Business.

Tournament theory is the theory in personnel economics used to describe certain situations where wage differences are based not on marginal productivity but instead upon relative differences between the individuals. This theory was invented by economists Edward Lazear and Sherwin Rosen.

Employment protection legislation (EPL) includes all types of employment protection measures, whether grounded primarily in legislation, court rulings, collectively bargained conditions of employment, or customary practice. The term is common among circles of economists. Employment protection refers both to regulations concerning hiring and firing.

Economics of participation is an umbrella term spanning the economic analysis of worker cooperatives, labor-managed firms, profit sharing, gain sharing, employee ownership, employee stock ownership plans, works councils, codetermination, and other mechanisms which employees use to participate in their firm's decision making and financial results.

Kathryn L. Shaw is the Ernest C. Arbuckle Professor of Economics at the Graduate School of Business, Stanford University. Previously, she was the Ford Distinguished Research Chair and Professor of Economics at Tepper School of Business, Carnegie Mellon University. From 1999-2001, she served as a Senate-confirmed Member of President Bill Clinton's Council of Economic Advisers.

<span class="mw-page-title-main">Oriana Bandiera</span> Italian economist

Oriana Bandiera, FBA is an Italian economist and academic, specialising in development economics. She has been Professor of Economics at the London School of Economics since 2009. She is currently the Sir Anthony Atkinson Professor of Economics at the London School of Economics, and co-editor of Econometrica. Her area of study primarily concerns organizations and labor markets, and their relationship with the process of economic development.

Lisa Blau Kahn is a professor of economics at the University of Rochester. Her research focuses on labor economics with interests in organization, education, and contract theory. From 2014 to 2018, she served as an associate professor of economics at Yale School of Management and as an assistant professor of economics at Yale School of Management from 2008 to 2014. From 2010 to 2011, Kahn served as the senior economist for labor and education policy on President Obama's Council of Economic Advisers.