Ecom 106I Final, Wimter 2020
新加坡经济学Final exam代考 With the PPP, installers earn about a bit more than 8£0 per replaced wind- shield (due to the extra items).
1.Safelite (50 points) 新加坡经济学Final exam代考
- Low effort because of missingincentives
- Missing incentives attracts the wrong kind ofinstallers
Mom & Pop stores might have advantage that they can monitor installers more directly
- Low demand(seasonality)
- High Turnover: Transitioning employees and swapping out equipment, filling out hiring paperwork is a fixed cost incurred every time an employee needs to be replaced. Even in an industry with little firm specific capital this will still reduce productivity.
–Wrong parts (fi0-£0% of thetime)
–Inefficientdispatcher (e.g. not scheduling appointments close to each other)
–Assigningjobs based on equity rather than efficiency, so everyone is un-
(b)PPP (see figure atend) 新加坡经济学Final exam代考
- In the baseline the hourly wage is 8fi0-fi£, so daily compensation at eight hours a day is around 890
- With the PPP, installers earn about a bit more than 8£0 per replaced wind- shield (due to the extra items).
- Thus, it takes about four windshields to exceed the originally guaranteed rate, and about three windshields to exceed the reduced guaranteed rate.
(c)Does PPP address theproblem
- Does address effort byincentives
- Does attract the right kind ofinstallers
–But, may also select on risk-aversion, e. most risk-tolerantinstallers
- It cannot address demand due toseasonality
- It may address the operational probemsindirectly
–Installersrely on warehouse workers and dispatchers for parts, directions, and assignments
–Butwhile they cannot control these factors directly, they can check they have the right parts, won‘t drive crazy distances, and might give put pressure on dispatchers to efficiently
- Managers are also on theplan
–They will lower number ofinstallers 新加坡经济学Final exam代考
- It does not clearly address the high turnover. It could raise turnover if most employees are risk averse and prefer a fixed wage, or it could reduce turnover if it allows employees to make more than previously.
- Problems with theplan
- It may raise the wagebill
- Itexposes installers to risk (some random, some dependent on others)
–Operational problems (e.g. wrongglass)
–Low demand inwinter
- Manager incentives may gowrong
–Paid to install, but not to Do lousy job at thelatter.
–Take best jobs for
- Might go down because installers focus on quality rather than quantity. Ex- amples
–Not being as nice, g. vacuumingglass 新加坡经济学Final exam代考
- This can be addressedby
–Making installer fix poorly installedwindshields
–Paybased on customer feedback, and/or whether customers return.
–But. . . could then try to harass customers to give them good scores!
- Turnover is high because of the seasonality in the industry and the lack of employer-specific skills
- Turnover is a problem because of recruiting and trainingexpenses
- The PPP may initially increase turnover as composition of workforce adapts to the new compensation scheme.
- Thenturnover will hopefully drop below due to higher
- This kind of turnover is not a bug, but a feature of the
- If on the other hand, turnover increases permanently, recruiting and training expenses will remain high
- There is a possibility it could increase turnover if the incentives fail, as the guarantee alone was not a competitive wage. This also depends on the pay structure chosen by competitors.
Some guarantee seems necessary to buffer risk for installers (rely on paycheck for families)
- If raise guarantee 新加坡经济学Final exam代考
–Attacts agents, so helps recruiting(＋)
–Attracts worse agents(-)
–Dampens incentives for low-performing employees(-)
–Raises wage bill(-)
–Loweringit below the current wage may send the wrong message that this is about cutting compensation, rather than increasing productivity
–Worst case: Installersunionize
- Could keep as is, and not raise with
- Could be set so that latent effort pay is a little below market wage but not too much. Could also be tuned after based on how the incentives work, and how many windows are being installed.
(h)Piece rates atSafelite
–Quality trickier¡ need another measure
- Output controllable relative to many otherprofessions
–Outputwill rise/fall on any given day, but average out over a month.
- How risk averse arethey?
–Low-incomeworkers could live paycheck-to-paycheck. Risk may be
- Could we monitorinstead?
–Direct monitoring of effort difficult for technicians in the field
2. Productive Effort amd Pretemd Effort. 新加坡经济学Final exam代考
(a)(2 points) Workerutility
First-order condition wrt e1
(b)(2 points) Compensation α ＋ βe1 is a transfer that washes out when calculating total value, which is given by
(c)(2 points) First order condition: β*= 5.
(d)(4 points) Worker utility
First-order condition wrt e1, e2
(e)(4points) Compensationw + βm is a transfer that washes out when calculating total value, which is given by
(f)(4points) The first-order-condition for maximizing total value is 5 = 5β**, so
β** = 1.
(g)(7 points) Since incentives induce pretend effort, pretend effort is costly to the employee, and John Copycat has to bear these costs through the fixed wage necessary to attract his employee in the first place, these additional costs lower theoptimal level of The total value generated by Lincoln and Copycat equal 5β*— (β*)2 = 12.5, and 5β** — (β**)2 = 2.5, so Copycat‘s inability to detect pretend effort lowers surplus by 10.
3.PerformamcePay: 新加坡经济学Final exam代考
(a)Baseline (5 points)
- Agentutility α ＋ βe — e2 FOC β = e*(β)
- Total value pβ — β2 = β* =100
- Total value pβ — β2= 1OOOO — 5OOO = 5OOO
- Equilibrium effort e*= β as above
- Total value of contract pe — C(e) — β2rV
- Equilibriumvalue pβ — β2(1+rV)
- Optimal incentivepay
- Total value pβ — β2(1+rV)= 2500-1250＝1250
The optimal incentive pay is lower than in (a), since now the incentive pay has the disadvantage of exposing the store manager to risk. The resulting total value is lower because of the cost of that risk. In fact, for the original contract with Ø = fiOO, the total value of the contract would be negative 1OO ∗ 1OO — 1OO2(1 ＋ 3) = 1O, OOO — 2O, OOO = —1O, OOO.
(c)Lower risk (11 points)
- Since the common and the idiosyncratic shocks are independent, it is optimal to incentivize the store manager by correcting for the common shock, i.e. compensating her based on Z — XC = e ＋ XI.
- To formally prove this (not required), the formula from class implies γ*=
so the optimal peformance measure equals Z —γ*XC = e ＋ XC + XI — XC = e + XI.
- Thevariance of this peformance measure equals V ar(XI) = VI = 1
- Total value pβ — β2(1 + rV ) = 5OOO — 25OO = 25OO
- The optimal incentive pay is lower than in (a) but higher than in (b), since now the incentive pay exposes the agent to an intermediate degree of risk. The resulting total value is between those of cases (a) and (c) because of the cost of that risk.