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ECONOMY
be directly related to the compa- Bengt Holmstrom should train students to win a
ny’s performances. lot of points in tests, however it
• Born in 1949 in Helsinki, Finland is equally important that they
Holmstrom also indicates the • He graduated at the University of Hel- should train them and support
influence of the prospects for fu- sinki, Finland, with a focus on subjects them to think creatively and criti-
ture progress in career. Namely, in the field of mathematics, physics and cally. If the income of professors
the insistence to improve the statistics is directly and exclusively related
changes for successful future ca- • He obtained a master’s degree and a to the test results of the students,
reer makes the employees, who doctoral degree at Stanford University, the professors will neglect the ac-
are at the beginning of their ca- USA tivities for stimulation of the stu-
reer, to work harder even when • He has been a professor almost during dents’ creativity.
such above-average effort does his entire professional career. He taught
not bring them direct growth of at Northwestern University and Yale Uni- The contribution of the second
the current salary. This is some- versity Nobel Prize winner, Professor Oli-
thing like implicit incentives • He was also a consultant to numerous ver Hart, is related to incomplete
which are not formalized in the companies, one of which was Daimler- contracts. When preparing busi-
employment contracts. Benz ness contract, all future eventual-
• Now he is a professor of economics and ities cannot be predicted ex ante,
Holmstrom has another con- management at the Massachusetts Insti- and the performances of the ac-
tribution (in the work with Paul tute of Technology (MIT) in Cambridge, tors - participants in the contracts
Milgrom) in regard to the multi- USA cannot be measured/confirmed
tasking model. For example, “the precisely. Therefrom, the con-
description of work assignments” tracts which are being prepared
at the workplace can include sev- in the real economic life are es-
eral different activities by nature, sentially incomplete. This means
whereby some are easily measur- that very often it is impossible to
able results and easy to monitor, prepare a contract which is based
while other results are difficult on the principle of payment ac-
to measure and monitor in an ef- cording to the realized perfor-
fective way. If the salary is related mances of the contracting par-
directly to the easily measurable ties. In such cases, the alternative
activities, the employees will be is to agree an appropriate alloca-
focused on such activities, and tion of the decision rights for use
they will neglect the ones which of resources. The decision rights
are difficult to be measured. This are essentially rights to ultimate
is a problem when the work as- control on the use of resources.
signments whose measurement The decision rights determine
is difficult, are exactly the ones the negotiating power of the con-
which require more creativity tracting parties when the mutual
and innovation, and less routine. rights and obligations should be
For this reason, the optimal em- defined in regard to the realized
ployment contracts should not be performances. And the negotiat-
based on direct, strong correla- ing power affects the motivation,
tion of the salary with the perfor- the strength of the incentives to
mance of the easily measureable, realize better performances.
routine assignments; on the con-
trary, it would be more adequate For example, the company
when the income of the employees wants to engage a researcher
contains higher fixed component, within its department of research
thereby motivating the employees and development. However, the
to make more balanced allocation innovations which would arise
of the work effort between rou- from the researches are essen-
tine and innovative activities. tially independent and cannot
be agreed ex ante. What are the
A typical example in this re- alternative contractual arrange-
gard is education. Professors
24 November 2016
