The Dynamics of Incentives, Productivity, and Operational Risk
Paul Anglin and
Gao Yanmin ()
Additional contact information
Gao Yanmin: College of Business, City University of Hong Kong, Tat Chee Avenue, Kowloon, Hong Kong
The B.E. Journal of Theoretical Economics, 2016, vol. 16, issue 1, 181-215
This paper develops a dynamic principal-agent model and applies it to understand changes in labor productivity and operational risk. Our analysis demonstrates the importance of matching the terms of the job contract to the technology. Such issues would be especially important in service industries and in the knowledge-based economy where discretionary effort tends to play a greater role. We show that the production technology needs to be characterized by at least two parameters: one parameter which measures output independent of the worker’s effort and a second parameter which measures the effect of the effort. We solve for the Renegotiation-Proof Nash Equilibrium. We show that there can be a tension between increasing expected productivity and controlling costs per worker. Our analysis also adds to the growing interest in “operational risk”, which is associated with human actions. The closed form solutions provided by our model provide a natural way to consider the impact and possibility of this type of risk. Our analysis demonstrates why the effect of a negative event should be considered relative to a concept of normal which is based on an equilibrium, that uncertainty in the external environment enables (but does not cause) operational risk events and that both the equilibrium and the effects vary with the production technology.
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
https://www.degruyter.com/view/j/bejte.2016.16.iss ... -0043.xml?format=INT (text/html)
For access to full text, subscription to the journal or payment for the individual article is required.
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:bpj:bejtec:v:16:y:2016:i:1:p:181-215:n:2
Ordering information: This journal article can be ordered from
Access Statistics for this article
The B.E. Journal of Theoretical Economics is currently edited by Burkhard C. Schipper
More articles in The B.E. Journal of Theoretical Economics from De Gruyter
Bibliographic data for series maintained by Peter Golla ().