A Comparative Analysis of Work Incentives in U.S. and Japanese Firms

Problems of moral hazard and adverse selection in business organization require appropriate work incentives to obtain an efficiency of the organization. This paper reviews theoretical grounds of various incentive problems and the practices of the U.S. and Japanese work incentives are examined in view of theories: age-earnings profile, alignment of interests, monitoring and multi-agents. The paper concludes that the Japanese incentive devices for blue-collar workers differ from the U.S., but the Japanese incentive devices for white-collar workers are not much different from their counterpart in the U.S. INTRODUCTION As the Japanese economy gains its weight in the world economy there have been increasing efforts to understand the differences in U.S. and Japanese firms. In analyzing the differences one can delve into the capital structure and work incentives. Studies demonstrated that the higher productivity growth in Japan is caused by rapid capital growth in Japan. However, many scholars traced the origin of the differences between U.S. and Japanese firms from the incentive devices used in Japanese firms. This paper is to focus on work incentives in U.S. and Japanese firms. Burgeoning interests in work incentives have emerged in the principal-agency literature. The increasing awareness of the incentive issue is partly attributable to the failed Soviet economy. A salient incentive problem in socialistic countries is expressed in a frequently cited phrase: "Governments pretend to pay and workers pretend to work." Incentive incompatibility between planners (principals) and workers (agents) in a socialistic economy is well documented in literature. However, more important reasons for the interest in work incentives is stemming from the economists' efforts to comprehend the miro-micro (internal) structure of the firm. Many studies on the principal-agency relationship deal with work incentives. Problems associated with the principal-agency relationship are adverse selection and moral hazard. The ways of coping with these problems in the U.S. and Japanese firms may differ from each other. This paper will examine the ways of coping with the problems from the theoretical remedies and practices. Section II will review a development of incentive problems from the context of the principal-agency literature. Work incentives in U.S. and Japan will be evaluated in Section III. Section IV will summarize the findings. THE THEORY OF INCENTIVES The Principal-Agency Problems The theory of incentives is developed in the context of the principal-agency framework. Whenever one individual acts on behalf of another, a principal-agency relationship arises. The individual taking the action is called the agent. The affected party is the principal. In economic life principal-agency relationships are ubiquitous. The lawyer is the agent, the client is the principal. The doctor is the agent, the patient is the principal. The corporate manager is the principal, his employees are the agents. The corporate manager in turn is an agent for the shareholders. When the manager hires a group of workers to perform a task for the firm the principal-agency relationship is established between them. The theory of incentives is concerned with the problem that a manager (principal) faces when his own objectives do not coincide with those of the employees (agents) of the firm. An agent may take an effort from a set of efforts. The output will depend on the random state of nature and the agent's effort. The output will rise stochastically as the level of efforts increases and the state of nature improves. In the case of agriculture, the crop will rise as the farmer's effort increases and the weather is favorable to the crop production. The payment to the agent depends on the output, states of the nature, the level of effort and the manager's information about the agent's effort and the state of the nature. …