Kellogg World Alumni Magazine, Spring 2001Kellogg School of Management
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Research: Sevin Yeltekin
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Research: Sevin Yeltekin

In perfect agreement
Assistant Professor Sevin Yeltekin analyzes why some contracts are more effective than others

Sometimes, it pays to pit workers against each other.

That's 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 a premium.

Prize 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."

Promoting 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," she says.

Yeltekin's 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.

"Whether 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 contract entirely."

Yeltekin 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.

Such contracts must not only protect workers, but motivate them as well.

"We 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.

"The bottom line is: How do you induce people to work hard? You have to give them an incentive. A good salary alone is often not sufficient."

--Rebecca Lindell

©2001 Kellogg School of Management, Northwestern University