Monday, 25 February 2008

Incentives matter: but I will ignore them file

In their book, The Theory of Incentives: The Principal-Agent Model, Jean-Jacques Laffont and David Martimort explain that one of the few economists even aware of incentive problems in the 1950s was Jacob Marschak .... and he choose to ignore them! (p.26)
This raises the problem of incentives. Organization rules can be devised in such a way that, if every member pursues his own goal, the goal of the organization is served. This is exemplified in practice by bonuses to executives and promises of loot to besieging soldiers; and in theory, by the (idealized) model of the laisser-faire economy. And there exist, of course, also negative incentives (punishments). I shall have to leave the problem of incentives aside. (Marschak 1955, p.128)
The Leeson pirate organization paper is a good example of some of what Marschak is saying.

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