Professor Sevin Yeltekin analyzes why some contracts are more
effective than others
it pays to pit workers against each other.
just one of the conclusions of Assistant Professor Sevin Yeltekin,
who studies the design of the optimal labor contract. "If
you're compensating people for a one-time interaction, it
makes sense to pay them for what they have produced,"
she says. "But if you're contracting with multiple groups
whose performance affects one another, it pays to set it up
as a tournament," so that the most productive party receives
schemes in other areas, such as the Olympics, are based on
relative, rather than absolute, performance, Yeltekin explains.
"It is quite natural to think of business environments
where relative compensation would also be useful, especially
if it's difficult to determine how much an individual's success
is due to his own effort or to outside factors."
the best in a group of employees -- for example, by giving
bonuses to those who reach higher sales figures -- is a form
of tournament, Yeltekin says. "We'd like to understand
when it's most appropriate to use tournaments and how the
rules should be adjusted according to the business environment,"
goal is to develop models for the best possible contracts
under any economic circumstances -- a tall order, considering
that conditions are constantly changing. The assistant professor
of managerial economics and decision sciences uses game and
contract theory to develop her models, which take into account
everything from economic slowdowns to new monetary policies.
there's a recession or a boom, our models should be able to
explain what's happening," she says. "For example,
there are times a company wants to lay people off, but retain
the right to call them back to work if conditions improve.
Other times, the projected future income isn't high enough
to make it worth retaining those jobs. You want to understand
how to write a contract that gives management and workers
options, and incorporates the possibility of terminating the
says her models are as applicable to a government drawing
up a social policy as they are to a corporation dealing with
an individual worker. "Social Security is still a contract,
unemployment insurance is still a contract," she notes.
must not only protect workers, but motivate them as well.
would like to design social policies that protect people against
the chance that an economic downturn in their region or industry
could lead to a lifetime of low earnings or involuntary unemployment,"
Yeltekin says. "However, we also need to take into account
the possibility that these social contracts may induce people
to save less or not work hard enough to stay on the job.
bottom line is: How do you induce people to work hard? You
have to give them an incentive. A good salary alone is often