Knowledge that Transforms

A two‐period, career‐concerns model with symmetric information but uncertainty about each worker’s ability is analyzed. Contracts are unobservable, but incomes are observable. It is shown that effort is distorted upward by contracts being unobservable and that the distortion depends positively on turnover.

This article considers the impact of nondiscrimination (ND) rules in the federal tax code. Nondiscrimination rules limit within‐firm inequality in the provision on nonwage benefits, but they place no corresponding limit on within‐firm inequality in wages. Firms can skirt ND rules by moving workers with unusual benefits into part‐time and seasonal positions because workers in such positions are excluded from some ND compliance calculations. We examine these issues empirically and find relationships consistent with the hypothesis that ND rules provide a binding constrain on within‐firms benefits inequality.

From 1981 to 1991 the mean earnings of immigrants fell further behind those of natives in Hong Kong, with the earnings gap widening from 11.3% to 25.5%. Earnings divergence of this magnitude is rather unusual among countries that receive many immigrants. We show that earnings divergence in Hong Kong is mainly due to divergence between skill prices for immigrants' education and for natives' education. Intertemporal shift in the demand for skills caused by economic restructuring in Hong Kong has a differential impact not only on prices of different levels of skill, but also on prices of skills from different sources.

Medical students must receive residency training in a specialty before they can practice medicine in the United States. Since the residents' salaries do not adjust across specialties, residency positions are rationed, and medical students face uncertainty when choosing a specialty. Using a data set with the preferred and realized specialties for 7,200 medical students, I estimate a model where students consider entry probabilities when selecting a specialty. I find that medical students are responsive to expected income differences between specialties, which implies that policies that increase the income of primary care physicians can address shortages in these specialties.

Do multidivisional firms structure compensation contracts for division managers to mitigate incentive problems in their internal capital markets? I find evidence that compensation and investment incentives are substitutes: firms providing a stronger link to firm performance in incentive compensation for division managers also provide weaker investment incentives through the capital budgeting process. Specifically, as the proportion of incentive pay for division managers that is based on firm performance increases, division investment is less responsive to division profitability. These findings are generally consistent with a model of influence activities by division managers in interdivisional capital allocation decisions.

This study uses a model of comparative advantage to model the choice of workers into three broad occupations. The pursuit of comparative advantage is shown to reduce the level of inequality from what would occur in a random assignment of workers into occupations. However, after pricing the skills of workers separately within occupations, the results indicate that the sectors are becoming more similar in the way that they value workers' skills, thus reducing the importance of comparative advantage over time. Inequality is rising as the economy is increasingly characterized by the pursuit of absolute advantage rather than comparative advantage.

This study examines the determinants of performance measure choices in worker incentive plans. The results indicate that informativeness issues such as those addressed in economic theories have a significant effect on measurement choices. However, other reasons for adopting the plans, such as upgrading the workforce and linking bonuses to the firm’s ability to pay, also influence measurement choices, as do union representation and management participation in plan design. Moreover, the factors influencing the use of specific measures vary, suggesting that the aggregate performance measure classifications commonly used in compensation research provide somewhat misleading inferences regarding performance measurement choices.

Home‐based work differs from other employment because the work site is the home itself. This difference means that the fixed costs of working at home are less than the fixed costs of working on site and that home‐based workers may engage in joint market and household production. Using data from the 1990 Census, we find that home‐based work is an attractive option for women for whom the fixed costs of work are high—women who have small children, are disabled, or live in rural areas—and that home‐based workers are more likely to choose self‐employment than are on‐site workers.

This study explores corporate responses to 1993 legislation that capped the corporate tax deductibility of top management compensation not qualified as “performance‐based.” Our analysis suggests that the cap may have created a focal point for salary compensation but had little effect on total compensation levels or growth rates at firms likely to be affected by the limit. There is little evidence that the policy significantly increased the performance sensitivity of chief executive officer (CEO) pay at affected firms. We conclude that corporate pay decisions have been relatively insulated from this policy intervention.

Theoretical models of self‐employment posit that attitudes toward risk, entrepreneurial ability, and preferences for autonomy are central to the individual's decision between self‐employment and wage/salary work. I provide indirect evidence on this hypothesis by examining the relationship between drug dealing as a youth and legitimate self‐employment in later years using data from the National Longitudinal Survey of Youth. I find that drug dealers are 11%–21% more likely to choose self‐employment than non‐drug‐dealers, all else equal. After ruling out a few alternative explanations, I interpret these results as providing indirect evidence supporting the hypothesis.