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A Theory of Optimal Sick Pay

By Andrew Tutt

Illness significantly reduces worker productivity, yet how employers respond to the possibility of illness and its effects on work performance is not well understood. The 2003 American Productivity Audit pegged the cost to employers of lost productive time due to illness at 225.8 billion US dollars/year. More importantly, 71% of that loss was explained by reduced performance while at work. Studies of worker illness have been up to this point empirical, focused primarily on characteristics which co-vary with worker illness and absenteeism. This paper seeks to understand how employers mitigate the impact of illness on profits through a microeconomic model, elucidating how employers influence workers through salary-based incentives to mitigate its associated costs, providing firms and policy
makers with a comprehensive theoretical method for formulating optimal sick pay policies.

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Advisor: Huseyin Yildirim

Multiparty Bargaining Strategies Comparing Nash Bargaining Payoffs of Bilateral and Multilateral Negotiation Strategies during Conflict Bargaining

by Alexander Crable

2003, the United States and North Korea have been at odds over the creation and continuation of a North Korean nuclear weapons program. While North Korea lobbies strongly for these differences to be sorted out through bilateral negotiations between the two nations, the United States refuses to partake in any negotiations other than the multilateral Six-Party Talks. Seeking to determine if the bargaining framework (bilateral or multilateral) between several economic agents might grant one or more agents a strategic advantage, we developed a three-player bargaining model for both a single multilateral negotiation and for a series of bilateral negotiations involving all three players. We also included in our model “conflict coefficients” which can simulate disagreement erupting into damaging conflict between two players. Hence, our model can further simulate nations on the brink of armed conflict, companies at risk of entering a price war, or other scenarios where players might cause a
decrease in each other’s initial wealth or utility. Conflict coefficients were designed in such a way that they can be removed from the model effortlessly to attain more general results. We concluded that there are indeed strategic advantages and disadvantages of multilateral and bilateral bargaining games for each player depending on their disagreement points and the surpluses being divided. In cases of conflict bargaining, expected payoffs for each player and preferred bargaining framework are further affected by their own conflict coefficient and those of the other players.

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Advisor: Huseyin Yildirim

Caught Red-Handed: Corporate Labor Practices and the Investigatory Media, a New Look at Corporate Social Responsibility

By Jessica Lohrman

Firm self-regulation with regards to illegal and unethical labor practices has become a significant trend recently, as firms face possible negative exposure from the investigatory media. This paper provides a theoretical analysis of the determinants corporate labor practices and the role played by the investigatory media in firm self-regulation. The model finds that firms, when facing a media investigation, are no more likely to use unethical labor regardless of how cost effective it is. Instead, the firm is actually driven towards certain labor choices based upon the parameters of the investigatory media’s profitability. This communicates the importance of outside monitoring bodies on the road towards improved global labor standards.

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Advisor: Huseyin Yildirim

A Bargaining Theory of the “Edwards’ Effect” in the 2007-8 Democratic Presidential Primary

By Alex Li

2008’s Democratic Presidential Primary will go down as one of the most competitive races in recent history. Two candidates, Senators Barack Obama (Illinois) and Hillary Clinton (New York), fought a see-saw battle to obtain enough delegates/vote-shares for the Democratic nomination. Although the race eventually dwelled down to these two players, for a while it was a dynamic three-player-race with Senator John Edwards (North Carolina) in the fold. During that time, many people were puzzled by Edwards’ insisting on staying in the race even when he had no foreseeable chance of becoming the party’s eventual nominee. In this honors thesis, I construct a theoretical model to explain Edwards’ reason for staying in the race. My model found that if Edwards attains a certain amount of vote-shares, depending on the external circumstances, he could have pushed the election into a backroom negotiation phase. In this phase, he would have become the most pivotal player as his relatively low amount of vote-shares would ironically turn him into the player with the greatest negotiating power. This could have allowed him to come out of the backroom negotiation with a final prize value that would have exceeded the efforts he inputted. My paper coins this as “The Edwards Effect” and explores the ramifications and conditions for its existence.

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Advisor: Huseyin Yildirim

Individual Incentives within Team Competitions

By Lisa Lam

This paper develops a theoretical model to show the effects of simultaneously having both a competition between groups and one among the individuals of a tournament. The players are divided up among teams and compete for a at bonus for winning the team competition. At the same time, their efforts also determine if they will win another at bonus from winning the individual game among all
the tournament’s players. With the use of a specific team production function demonstrating substitution among the player’s efforts, the individual award seems to garner more overall group output than the group award. Under a specific production function demonstrating complementary efforts, players seem to be indifferent between the group and individual award. Lastly, a general production function that incorporates a variable measuring the degree of substitution was analyzed. The analysis showed that an individual award was beneficial to increasing overall team effort. The results imply that the payment scheme should be structured in a way that allocates larger individual rewards when the team efforts are more substitutable.

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Advisor: Huseyin Yildirim

Soft-Targets and Incentive Compensation in Non-Prot Organizations

By Helin Gai

Monetary targets are highly prevalent in fundraising campaigns. Although some theoretical research has been conducted to explain why fundraising organizations set such targets when charities are raised to fulfill certain capital requirements, there has been no literature that can suitably answer why a target is still announced when such capital requirements are not present. On the other hand, empirical studies have shown that performance-based incentive compensation has become more and more prevalent in the nonprofit sector. Based on the empirical observations, the author theorizes that fundraising organizations implement incentive compensation that is dependent on whether a soft target is reached, in order to motivate the fundraising staff to exert more effort in reaching out to potential donors. This paper presents a theoretical model using a game theory framework to account for the existence of \soft targets” in the fundraising industry.

 

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Advisor: Huseyin Yildirim

Bundling Donations to Charity with Product Purchases: A Business Incentives Model

By Kassity Liu

This paper focuses on developing a business model that explains why certain companies would bundle their products with donations to charity. The model assumes that consumers are individuals that maximize their utility subject to their income and companies are agents that maximize their profits subject to prices and costs. The type of rm that we will focus on will be the monopoly. We will investigate the different situations where a monopoly might choose to engage in charity-linked product bundling and look at several factors that may lead to their decision to do so. These factors include: small vs. large prices, homogeneous vs. heterogeneous populations, and strong vs. weak consumer preferences for charitable donations. In the end, the model shows when a why a rm would choose to market a charity-linked product, even when it is the rm who pays for the entire price of the donation.

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Advisor: Huseyin Yildirim

The Thought That Counts: Towards a Rational Theory of Gift-Giving

By Lydia Yao

From an economic perspective, the practice of gift-giving in social relationships makes little sense due to the inefficiencies that arise from commonly mismatched gifts and preferences. This paper addresses the frequency of non-monetary gifts compared to more efficient cash transfers. While there is a vast literature concentrated on this cultural phenomenon, we examine a model based on the idea that the sentimental value of a gift can be measured in terms of the time and energy the donor spent to select a desirable gift for the recipient. We demonstrate that under a variety of circumstances, individuals choose to give non-monetary gifts over cash in order to signal to the recipient that they exerted this effort.

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Advisor: Huseyin Yildirim

Building Quality in Wikipedia: A Theoretical Approach

By Guangyuan Zhu

Wikipedia is known as a convenient source of user generated information for a wide range of topics, but is it able to compete in quality with a print encyclopedia? In this paper, I formulate a theoretical framework to investigate this topic. I begin with a two-step sequential case for both Wikipedia and print encyclopedia, in which I find that the quality of Wikipedia is generally slightly lower than that of a print encyclopedia. In an extension to an n-person case, I find that the quality of Wikipedia can rise higher than that of print encyclopedia. After taking into account the generally lower costs of contribution for Wikipedia, this small difference will be eliminated.

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Advisor: Huseyin Yildirim

The Rationale Behind P2P Network Users

By Brian Choi

An online distribution of copyrighted materials through P2P network is one of major legal issues today. While several P2P users have been fined severely for a violation of a copyright law, an illegal file sharing within the P2P network still continues to thrive, and the effectiveness of the punishment against P2P users is often questioned. In this paper, I examine why P2P networks prosper in spite of government’s heavy punishment schemes. Then I model the optimal decision of the P2P user as a non-cooperative game and find out how effectively legal sanction reduces an illegal online distribution of copyrighted materials.

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Advisor: Huseyin Yildirim

Questions?

Undergraduate Program Assistant
Jennifer Becker
dus_asst@econ.duke.edu

Director of the Honors Program
Michelle P. Connolly
michelle.connolly@duke.edu