25 Lecture%20incentive%20pay%201 - Today Piece-rate pay...

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    
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 Today Piece-rate pay Tournaments Efficiency Wages
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  Bear Stearns: $34 million for CEO James Cayne. The acknowledged direct cost to the taxpayers from Bear's demise so far is $2.7 billion ; ten times that number may be a more reasonable assessment of the actual cost. Lehman Brothers: $27 million for CEO Richard Fuld. The financial freeze that followed the collapse of Lehman is seen by many as the key event that turned the recession of 2007-08 into the frightening freefall currently under way. Citigroup: $25 million for CEO Charles Prince. Citi's stock price has since fallen from $50 a share to $3.50. Countrywide Financial: $43 million for CEO Angelo Mozilo. According to Ashcraft and Schuermann , Countrywide was at that time the nation's leading issuer of subprime mortgage-backed securities and the third biggest originator of subprime mortgages. http://www.econbrowser.com
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       Are they fair? High payouts to execs? Bonuses to those that made risky investments? What is their purpose?
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  We have always considered the “wage” as the price of labor/payoff to working Workers trade off hours of leisure for hourly earnings Assumed workers are an input to production like capital one setting
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  What really happens after a worker is hired? •A s s u m e t h a t w o r k i s h a r d ( e x e r t i n g e f f o r t = d i s u t i lity, dU/de <0) Worker will minimize effort, all else equal Worker’s objectives may not align with the owner’s objectives. Worker will maximize own utility at cost of firm profits
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       “I’ve always subscribed to the idea that if you really want to impress your boss you go in there and you do mediocre work, half heartedly” “I was going to use today to purge my inbox, but now something much more pressing has come up.”
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  We have always considered the “wage” as the price of labor/payoff to working Workers trade off hours of leisure for hourly earnings Assumed workers are an input to production like capital one setting All workers will exert minimal effort to keep job (q-bar)
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       How do they do this?
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This note was uploaded on 01/19/2011 for the course ECON ECON 440 taught by Professor Kristinebrown during the Fall '10 term at University of Illinois at Urbana–Champaign.

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25 Lecture%20incentive%20pay%201 - Today Piece-rate pay...

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