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Abstract:
This study reports the results of three experiments that examine how preferences for wealth and honesty affect managerial reporting. We find that subjects often sacrifice wealth to make honest or partially honest reports, and they generally do not lie more as the payoff to lying increases. We also find less honesty under a contract that provides a smaller share of the total surplus to the manager than under one that provides a larger share, suggesting that the extent of honesty may depend on how the surplus is divided between the manager and the firm. The optimal agency contract yields more firm profit than a contract that relies exclusively on honest reporting. However, a modified version of the optimal agency contract, which makes use of subjects' preferences for honest reporting, yields the highest firm profit. These results suggest that firms may be able to design more profitable employment contracts than those identified by conventional economic analysis.

Experiment, Honesty, Incentive contract, Managerial reporting

Abstract:
As part of a federal government initiative to increase efficiency and quality, in 1996 the United States' VHA (Veterans Health Administration) radically restructured its organizational design and management processes. This study uses 1992-1998 clinical, workload and financial data to examine the effect of this reform on performance. Several previous government attempts to introduce private sector management practices, such as management by objectives (MBO) or program planning and budgeting system (PPBS), have been largely unsuccessful. In contrast to prior reforms, the current restructuring introduced coordinated changes in the VHA organizational structure, performance measurement, and reward systems. Our results document that, following the reorganization, the VHA cost per patient declined significantly and various quality measures improved. Our analysis suggests that reduction in excess capacity and the more intense use of remaining capacity are among the primary explanations for the VHA achieving the observed cost reductions. These findings suggest that coordinated changes in organizational structure, performance measures and incentives can create value for public enterprises even though control mechanisms are generally more limited in these environments than in the private sector.

Value, public sector, coordination, organizational design, performance, incentives, strategic performance management

Abstract:
To address agents' moral hazard over effort, incentive contracts impose risk on the agents. As performance measures become noisier, the conventional agency analysis predicts that principals will reduce the incentive weights assigned to such measures. However, prior empirical results (Prendergast 2002) frequently find the opposite, i.e., incentive weights are larger (agents bear more risk) in more uncertain environments. This paper provides new evidence on the association between the extent of uncertainty and the level of risk imposed on agents. In the context of contracts between managed care organizations and physicians, we examine the effect of task characteristics and the legal liability environment on the extent of risk that physicians bear. We derive the optimal weighting of multiple performance measures in a model of a physician's choice of revenue-generating and cost control efforts. The model predicts that physicians who face less task uncertainty bear more cost risk in their contracts, as predicted by the conventional moral hazard model. Likewise, the model predicts that as the association between task uncertainty and legal liability uncertainty becomes stronger, physicians bear less cost risk in their contracts. Our empirical results generally support these predictions. We offer an explanation for why these results tend to be consistent with the conventional moral hazard analysis, contrary to empirical results in a number of previous studies.

Risk-sharing, incentive contracts, legal liability, task characteristics

Abstract:
To address agents' moral hazard over effort, incentive contracts impose risk on the agents. As performance measures become noisier, the conventional agency analysis predicts that principals will reduce the incentive weights assigned to such measures. However, prior empirical results (Prendergast 2002a) find the opposite; i.e., incentive weights are larger (agents bear more risk) in more uncertain environments. This paper provides new evidence on the association between the extent of uncertainty and the level of risk imposed on agents. In the context of contracts between managed care organizations and physicians, we examine the effect of task characteristics and the legal liability environment on the extent of risk that physicians bear. We derive the optimal weighting of multiple performance measures in a model of a physician's choice of revenue-generating and cost control efforts. The model predicts that physicians who face less task uncertainty bear more cost risk in their contracts, as predicted by the conventional moral hazard model. Likewise, the model predicts that as the association between task uncertainty and legal liability uncertainty increases, physicians bear less cost risk in their contracts. Our empirical results generally support these predictions. We offer an explanation for why these results tend to be consistent with the conventional moral hazard analysis, contrary to results in prior empirical studies.

Risk-sharing, incentive contracts, legal liability, task characteristics

Abstract:
This study examines the use of non-financial performance measures in physician compensation contracts. Based on agency theory, we develop hypotheses predicting that such measures are more likely to be used in settings in which the measures are more informative, when alternative control mechanisms are complements rather than substitutes to non-financial performance measures, and when external pressures for quality of care and cost-containment are greater. We test these hypotheses based on a national survey of physicians administered four times over the 1996 to 2005 period. Our tests lead to the conclusion that non-financial performance measures play a significant role in physician compensation, acting to balance other incentives based purely on individual productivity. We also provide evidence that physician ownership of the practice, more prevalent in small practices, serves as a substitute for non-financial performance measures, thereby reducing their role.

Abstract:
This paper analyzes the causes and consequences of CEO retention in bankrupt firms. Our results indicate that bankrupt firms are more likely to retain their CEOs when the CEO is perceived to be more talented and to possess more firm specific information. Over our sample period of 1991 to 2003, CEO retention by bankrupt firms is associated with better post-bankruptcy firm performance. This result contrasts with Hotchkiss (1995) who finds that, in her sample period of 1979-1988, CEO retention was associated with significantly worse post-bankruptcy firm performance. We attribute this reversal to changes in the bankruptcy environment from the 1980s to the 1990s, particularly the evolution in the use of a set of contractual practices, such as debtor-in-possession financing, prepackaged bankruptcy and targeted CEO financial incentives. This new environment in the 1990s enabled bankrupt firms to retain more talented CEOs and to provide these CEOs with more effective incentives to maximize value for creditors and equity-holders.

Abstract:
Employers in the United States provide many welfare-type benefits, such as life insurance, disability insurance, health insurance, and pensions, to their employees. Employers can be viewed as performing an agency role in purchasing pension, health, and other welfare benefits for their employees. An exploration of their competence in this role as agents for their employees indicates that large employers are very helpful to their employees in this arena. They seem to contribute to individual employees' welfare by providing them with valued services in purchasing health insurance.