Experimental elicitation of ambiguity attitude using the random incentive system

Performance-measure weights for incentive compensation are often determined subjectively. Determining these weights is a cognitively difficult task, and archival research shows that observed performance-measure weights are only partially consistent with the predictions of agency theory. Ittner et al. (2003) have concluded that psychology theory can help to explain such inconsistencies. In an experimental setting based on Feltham and Xie (1994), we use psychology theories of reasoning to predict distinctive patterns of similarity and difference between optimal and actual subjective performance-measure weights. The following predictions are supported. First, in contrast to a number of prior studies, most individuals' decisions are significantly influenced by the performance measures' error variance (precision) and error covariance. Second, directional errors in the use of these measurement attributes are relatively frequent, resulting in a mean underreaction to an accounting change that alters performance measurement error. Third, individuals seem insufficiently aware that a change in the accounting for one measure has spillover effects on the optimal weighting of the other measure in a two-measure incentive system. In consequence, they make performance-measure weighting decisions that are likely to result in misallocations of agent effort.

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Patents for Critical Pharmaceuticals: The AZT Case

American Journal of Law & Medicine ◽

10.1017/s0098858800007954 ◽

1991 ◽

Vol 17 (1-2) ◽

pp. 145-180

Author(s):

Evan Ackiron

Keyword(s):

The United States ◽

Incentive System ◽

The Public ◽

Incentive Programs ◽

The Past ◽

Research And Innovation ◽

Monopoly Pricing ◽

Conflicting Interests ◽

Necessary Evil ◽

Near Future

Patents and other statutory types of market protections are used in the United States to promote scientific research and innovation. This incentive is especially important in research intensive fields such as the pharmaceutical industry. Unfortunately, these same protections often result in higher monopoly pricing once a successful product is brought to market. Usually this consequence is viewed as the necessary evil of an incentive system that encourages costly research and development by promising large rewards to the successful inventor. However, in the case of the AIDS drug Zidovudine (AZT), the high prices charged by the pharmaceutical company owning the drug have led to public outcry and a re-examination of government incentive systems.This Note traces the evolution of these incentive programs — the patent system, and, to a lesser extent, the orphan drug program — and details the conflicting interests involved in their development. It then demonstrates how the AZT problem brings the interest of providing inventors with incentives for risky innovative efforts into a sharp collision with the ultimate goal of such systems: ensuring that the public has access to the resulting products at a reasonable price. Finally, the Note describes how Congress and the courts have attempted to resolve these problems in the past, and how they might best try to solve the AZT problem in the near future.

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