Economics Dictionary of ArgumentsHome
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Carl Shapiro on Incentives - Dictionary of Arguments
Parisi I 457 Rewards/punishment/sanctions/Incentives/ Stigler/Stiglitz/Becker/Shapiro/Dari-Mattiacci/De Geest: Annullable carrots are carrots that are paid unless the agent is monitored and found violating. They differ from normal carrots, which are paid if the agent is monitored and found complying. Similarly, annullable sticks are sticks that are applied unless the agent has been monitored and found complying. In essence, an annullable carrot is a threat to take back, an annullable stick a promise to give back (De Geest, Dari-Mattiacci, and Siegers, 2009)(1). Annullable carrots are mathematically identical to normal carrots if the probability of monitoring is 100%. Indeed, the difference between the normal and the annullable variants consists in what happens in case of no monitoring. If all agents are monitored all the time (p = 1), the difference disappears. Consider the case in which an employee receives a bonus unless he is underperforming to the case in which the employee receives the bonus only if he is found performing. If monitoring takes place with certainty, the employee will receive a bonus if he complies and no bonus if he violates in both scenarios. Yet there is an important difference if the probability of monitoring is less than 100%. In those cases, violating employees who were lucky enough not to be monitored still receive a bonus under annullable carrots. Parisi I 458 An example of annullable carrots can be found in the efficiency wages literature (Shapiro and Stiglitz, 1984(2); Becker and Stigler, 1974(3)). Here it has been argued that overpaying an employee can make sense because it gives the employee an extra incentive not to be fired. Indeed, the overpayment can be seen as a carrot that is paid unless the employee is monitored and found shirking. This extra incentive not to shirk may allow the employer to lower the monitoring levels and save on monitoring costs. This indicates that annullable carrots have a source of ineffectiveness that is absent in regular carrots. Regular carrots are only paid to agents who have been monitored (and found complying). Annullable carrots are paid not only to agents who have been monitored (and found complying) but also to agents who have not been monitored (and who may have complied or shirked). Paying a bonus to an agent who has not been monitored obviously has no incentive effect, because incentives are generated by the wedge between what compliers and violators receive. Therefore, a carrot paid to non-monitored agents is, from the viewpoint of the employer, “wasted money.” This wasted money may indirectly lead to inefficiency. Indeed, a profit-maximizing employer faces a trade-off between paying rents and bearing monitoring costs: the higher the overpayment, the lower the monitoring costs can be. But if rents have to be paid also to the agents who are not monitored, the employer will adopt inefficiently high monitoring levels in order to cut the frequency with which such rents are paid. This monitoring-level distortion is not present in a normal carrots regime, in which the bonus is only paid to monitored, complying agents (De Geest, Dari-Mattiacci, and Siegers, 2009)(1). 1. Dari-Mattiacci, Giuseppe (2009). “Negative Liability.” Journal of Legal Studies 38: 21–60. 2. Shapiro, Carl and Joseph E. Stiglitz (1984). “Equilibrium Unemployment as a Worker Discipline Device.” American Economic Review 74: 433–444. 3. Becker, Gary S. and George Stigler (1974). “Law Enforcement, Malfeasance, and Compensation of Enforcers.” Journal of Legal Studies 3: 1–18. Giuseppe Dari-Mattiacci and Gerrit de Geest. “Carrots vs. Sticks”. In: Parisi, Francesco (ed) (2017). The Oxford Handbook of Law and Economics. Vol 1: Methodology and Concepts. NY: Oxford University._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Shapiro I St. Shapiro Philosophy of Mathematics: Structure and Ontology Oxford 2000 Varian I Carl Shapiro Hal Varian Information Rules: A Strategic Guide to the Network Economy Brighton, MA 1998 Parisi I Francesco Parisi (Ed) The Oxford Handbook of Law and Economics: Volume 1: Methodology and Concepts New York 2017 |
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> Counter arguments against Shapiro
> Counter arguments in relation to Incentives
