Executive compensation consultants face potential conflicts of interest that can lead to higher recommended levels of CEO pay, including the desires to “cross-sell” services and to secure “repeat business.” We find evidence in both the US and Canada that CEO pay is higher in companies where the consultant provides other services, and that pay is higher in Canadian firms when the fees paid to consultants for other services are large relative to the fees for executive-compensation services. Contrary to expectations, we find that pay is higher in US firms where the consultant works for the board rather than for management.

We present a model of the creation of social networks, such as political parties, trade unions, religious coalitions, or political action committees, through discussion and mutual persuasion among their members. The key idea is that people are influenced by those inside their network, but not by those outside. Once created, networks can be "rented out" to politicians who seek votes and support for their initiatives and ideas, which may have little to do with network members' core beliefs. In this framework, political competition does not lead to convergence of party platforms to the views of the median voter. Rather, parties separate their messages and try to isolate their members to prevent personal influence from those in the opposition.

This paper studies optimal incentive contracts when workers have career concerns--concerns about the effects of current performance on future compensation. The authors show that the optimal compensation contract optimizes total incentives: the combination of the implicit incentives from career concerns and the explicit incentives from the compensation contract. Thus, the explicit incentives from the optimal compensation contract should be strongest for workers close to retirement because career concerns are weakest for these workers. The authors find empirical support for this prediction in the relation between chief-executive compensation and stock-market performance.

A country's most talented people typically organize production by others, so they can spread their ability advantage over a larger scale. When they start firms, they innovate and foster growth, but when they become rent seekers, they only redistribute wealth and reduce growth. Occupational choice depends on returns to ability and to scale in each sector, on market size, and on compensation contracts. In most countries, rent seeking rewards talent more than entrepreneurship does, leading to stagnation. Our evidence shows that countries with a higher proportion of engineering college majors grow faster; whereas countries with a higher proportion of law concentrators grow slower.

This paper considers the costs of reducing consumption of a good by making its production illegal and punishing apprehended illegal producers. We use illegal drugs as a prominent example. We show that the more inelastic either demand for or supply of a good is, the greater the increase in social cost from further reducing its production by greater enforcement efforts. So optimal public expenditures on apprehension and conviction of illegal suppliers depend not only on the difference between the social and private values from consumption but also on these elasticities. When demand and supply are not too elastic, it does not pay to enforce any prohibition unless the social value is negative. We also show that a monetary tax could cause a greater reduction in output and increase in price than optimal enforcement against the same good would if it were illegal, even though some producers may go underground to avoid a monetary tax. When enforcement is costly, excise taxes and quantity restrictions are not equivalent.

A thorough understanding of internal incentive structures is critical to developing a viable theory of the firm, since these incentives determine to a large extent how individuals inside an organization behave. Many common features of organizational incentive systems are not easily explained by traditional economic theory—including egalitarian pay systems in which compensation is largely independent of performance, the overwhelming use of promotion‐based incentive systems, the absence of up‐front fees for jobs and effective bonding contracts, and the general reluctance of employers to fire, penalize, or give poor performance evaluations to employees. Typical explanations for these practices offered by behaviorists and practitioners are distinctly uneconomic—focusing on notions such as fairness, equity, morale, trust, social responsibility, and culture. The challenge to economists is to provide viable economic explanations for these practices or to integrate these alternative notions into the traditional economic model.

We study the link between market forces, cross-sectional inequality, and intergenerational mobility. Emphasizing complementarities in the production of human capital, we show that wealthy parents invest, on average, more in their offspring than poorer ones. As a result, economic status persists across generations even in a world with perfect capital markets and without differences in innate ability. In fact, under certain conditions, successive generations of the same family may cease to regress toward the mean. We also consider how short- and long-run mobility are affected by changes in the returns to human capital.