Incentives and Transactions Costs Within the Firm: Estimating an Agency Model Using Payroll Records

Abstract

We estimate an agency model using the payroll records of a copper mine that paid a production bonus to teams of workers. We estimate the cost of incomplete information due to insurance and incentives considerations and the inefficiency caused by the simple form of the incentive contract itself. At the estimated parameters the cost of worker risk aversion (insurance) is of similar magnitude to moral hazard (incentives). Overall, incomplete information accounted for one-half of the bonus system's inefficiency relative to potential full information profits. The other half is attributed to the bonus system's inefficient generation of incentives and insurance relative to the optimal incentive contract.