Quarterly Personnel Update—2023_06
Peter Kuhn
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The Principal-Agent Problem
5.2-5.4: The Risk Sharing - Incentives Tradeoff
Tice, Frances M. 2023 The Role of Common Risk in the Effectiveness of Explicit Relative Performance Evaluation Management Science, forthcoming.
The author examines the effect of executives’ relative performance evaluation (RPE) on their firms’ performance and their risk-taking behavior. Consistent with their model’s predictions, RPE firms perform better than similar non-RPE firms when there is high common risk exposure and when the common risk removed by the CEO’s performance peers is high. In these circumstances, RPE also reduces the likelihood that the CEO will under-invest. Thus, RPE is associated with better risk sharing and stronger incentive alignment when (1) RPE firms are exposed to high common risk and (2) the pool of RPE peer firms is selected so as to remove common risk.
5.5: Multi-task Principal-Agent Interactions
Bertuzzi, Luca, Paul J. Eliason, Benjamin Heebsh, Riley J. League, Ryan C. McDevitt, and James W. Roberts 2023 Gaming and Effort in Performance Pay NBER working paper no. #31353
Health insurers often tie payments to providers’ quality of care. Although payers do this to elicit more effort from providers, some providers may game the system by avoiding patients who would cause their quality scores to fall. The authors use annual variation in the criteria for Medicare’s Quality Incentive Program in dialysis to distinguish strategic patient dropping from higher-quality care. Patients who would reduce their facilities’ scores are 14.3–71.5% more likely to switch facilities, often to ones that suggest the move was involuntary, while under certain conditions facilities exert more effort to improve their scores by providing better care.
5.8: Career Concerns
Ke, T. Tony, Christopher Li and Mikhail Safronov 2023. Learning by Choosing: Career Concerns with Observable Actions American Economic Journal: Microeconomics, 15 (2): 536-67.
In a dynamic career concerns context, the author studies workers’ choices between public tasks that produce output today and public tasks that signal the agent’s private information. When the wage can depend on the task choice, a first best allocation can be attained, and the author’s model provides an explanation for wage jumps at promotions: The worker is assigned the more productive but less informative task after promotion. If task choice is not contractible, then the worker devotes too much effort to the informative task, compared to what the firm wants.
Benson, Alan, Aaron Sojourner and Akhmed Umyarov. 2020. Can Reputation Discipline the Gig Economy? Experimental
Evidence from an Online Labor Market Management
Science, 66(5): 1783-2290.
The authors use three experiments to assess the value of MTurk’s reputation system for employers. They find that “good” employers (who do not decline to pay workers while keeping their work product) pay 40 percent more than other employers, and attract twice as many workers (of the same quality) as other employers. Using natural experiments provided by periods when the reputation system was down, they find that the reputation system attracts work to small, good employers who would otherwise be hard for workers to identify.
6. Optimal Monitoring
Dohmen, Thomas, and Elena Shvartsman 2023. Overexertion of Effort under Working Time Autonomy and Feedback Provision. IZA working paper no 16028.
The authors study workers who are free to choose their hours
and who are paid according to lump-sum bonuses.
In these settings, workers who cannot observe whether they have already
qualified for the bonus may work ‘too much’ to eliminate that uncertainty. Providing performance feedback eliminates this
effort overprovision.
Friebel, Guido, Matthias Heinz, Mitchell Hoffman, Tobias Kretschmer, and Nick Zubanov 2023, Is This Really Kneaded? Identifying and Eliminating Potentially Harmful Monitoring Practices Unpublished paper, Goethe University.
In a large German bakery chain, many workers reported negative perceptions of monitoring via checklists. After surveying workers and managers about the value and time costs of all the checklists, the firm randomly removed the two checklists with lowest perceived value and highest perceived time costs. Sales increased by 2-3% and store manager attrition substantially decreased. Mystery shopping indicates this occurs without a rise in workplace problems. Effects of checklist removal do not appear to come from workers having more time for production, but rather due to improvements in employee trust and commitment. Following the RCT, the firm implemented firmwide reductions in monitoring, eliminating a checklist that employees regard as demeaning, but keeping a checklist that helps coordinate production.
Evidence on Employee Motivation
8. Safelite and Other Incentives Success Stories
Christensen, Peter, Paul Francisco, and Erica Myers 2023 Incentive Pay and Social Returns to Worker Effort in Public Programs: Evidence from the Weatherization Assistance Program NBER working paper no. 31322
Using a field experiment, the authors evaluate the impact of performance bonuses for government contractors on the returns to spending in a large low-income energy efficiency assistance program. They find that performance-based bonuses dramatically increased program natural gas savings by 24%. The bonuses generate $5.39-$14.53 in social benefits for every dollar invested. Most of these gains result from contractors who were already performing at high quality before the intervention, and there were no quality reductions in non-incentivized tasks.
9.2 Intrinsic, Symbolic and Image Motivation
Bellet, Clément S., Jan-Emmanuel De Neve, and George Ward 2023 “Does Employee Happiness Have an Impact on Productivity?” Management Science, forthcoming
The authors use variation in telesales workers’ mood arising from visual exposure to weather—the interaction between call center architecture and outdoor weather conditions—to demonstrate a positive effect of happiness on productivity. Most of the effect occurs through workers converting more calls into sales, rather than making more calls per hour and or taking fewer breaks.
9.2.b Gamification
Benson, Alan, and Aruna Ranganathan 2020. A Numbers Game: Quantification of Work, Auto-Gamification, and Worker Productivity American Sociological Review, 85(3): 573-609.
Does monitoring workers improve or impair their productivity? Using personnel and operational data from an Indian garment manufacturing plant, the authors examine how an RFID monitoring intervention affected productivity. They find that monitoring significantly increased productivity for simple work, but significantly decreased productivity for complex work. The authors argue that complex tasks are more meaningful, thus raising workers' intrinsic motivation. Hawthorne effects are also observed, but they can be positive, negative, or neutral depending on work complexity.
10.7 Fairness Among Workers
Liu, Qi and Bo Sun 2023 Relative Wealth Concerns, Executive Compensation, and Managerial Risk-Taking American Economic Journal: Microeconomics 2023, 15(2): 568–598
Suppose that CEO’s care about their relative wealth (compared to other CEOs), not just their absolute wealth. How would we expect this to affect the types of contracts stockholders offer to CEOs? The authors show that in equilibrium, all firms might choose to pay CEOs for luck, in addition to paying for performance. This is because –if other firms are paying for luck—your own risk-averse CEO will value insurance against a compensation shortfall relative to their executive peers.
Peer Effects:
Harrington, Emma, Natalia Emanuel, and Amanda Pallais 2023. The Power of Proximity to Coworkers: Training for Tomorrow or Productivity Today? Unpublished paper, Harvard University.
In an increasingly digital world, how does sitting near coworkers affect collaboration, on-the-job training, and output? The authors study software engineers at a Fortune 500 firm, whose main campus has two buildings several blocks apart. When offices were open, engineers working in the same building as all their teammates received 23 percent more online feedback on their computer code than engineers with distant teammates. After offices closed for COVID-19, this advantage shrank by 17 percentage points. Sitting near coworkers increases how much junior engineers learn from their senior colleagues — not only in person but also online. However, sitting together reduces senior engineers’ programming output, suggesting a trade-off between short-term productivity and long-run human-capital development.
Selection
14: Recruitment: Formal versus Informal? Broad versus Narrow?
Barwick, Panle Jia, Yanyan Liu, Eleonora Patacchini and Qi Wu 2023 Information, Mobile Communication, and Referral Effects American Economic Review 113(5): 1170–1207
This paper uses the universe of cell phone records from a Chinese telecommunication provider to examine the role of information exchange in urban labor markets. They provide the first direct evidence of increased communication among referral pairs around job changes. Information provided by social contacts thus appears to mitigate information asymmetry and to improve labor market performance.
Internal versus External:
Benson, Alan and Ben Rissing. 2019. Strength from Within: Individual and Store-Level Evidence that Transfers Outperform Hires Organization Science, 31(6): 1475-1496.
Using data from commissioned retail salespeople and their managers, the author show that internally-hired workers perform better. While greater firm-specific skills and contextual learning are possible explanations for this gap, the authors show that the main explanation is differential retention: high performing internal hires are very unlikely to quit.
Networks:
Staiger, Matthew, 2022. The Intergenerational Transmission of Employers and the Earnings of Young Workers unpublished paper, Harvard University.
The author uses employer-employee linked data to study one important type of connection: jobs obtained at a parent’s employer. He finds that 29 percent of individuals work for a parent’s employer at least once by age 30. Working for a parent’s employer increases initial earnings by 19 percent, mostly because parents use their connections to provide access to higher-paying firms. The findings raise the possibility that connections to firms through one’s social network could be an important determinant of intergenerational mobility.
15: Choosing from the Pool: Testing, Discretion, and Self-Selection
Dinerstein, Michael, and Isaac M. Opper, 2023 Screening with Multitasking: Theory and Empirical Evidence from Teacher Tenure Reform Unpublished paper, University of Chicago
What happens when employers screen their employees but only observe a subset of output? The authors study a change to teacher tenure policy in New York City, which increased the role that a single measure – test score value added – played in tenure decisions. In response to the policy, teachers increased test score value-added and decreased output that did not enter the tenure decision. The increase in test score value-added was largest for the teachers with more ability to improve students’ untargeted outcomes, increasing their likelihood of getting tenure. As a result, increased incentives for observable performance (test scores) improved the selection process on harder-to-reward dimensions of teacher output.
Aman-Rana, Shan, Daniel W. Gingerich, and Sandip Sukhtankar 2023 Screen Now, Save Later? The Trade-Off between Administrative Ordeals and Fraud NBER working paper no. 31364.
Screening agents more carefully before interacting with them can reduce moral hazard problems, but too much screening raises administrative costs, causes delays, and could exclude honest agents. The authors study these trade-offs in one of the largest economic relief programs in US history: the Paycheck Protection Program (PPP). Using temporal variation in the documentation standards required for loan applications, they find that screening significantly reduced the amount of loan irregularities that likely indicate fraud. Just as important, increases in screening deterred borrowers with a checkered history from applying for loans in the first place. Because these applications no longer had to be screened, the documentation standards reduced fraud without imposing an undue administrative burden on legitimate firms.
16.3 Effects of Discrimination
Mauro Caselli, Paolo Falco, and Gianpiero Mattera 2023 When the Stadium Goes Silent: How Crowds Affect the Performance of Discriminated Groups Journal of Labor Economics 41(2). April 2023
Using a natural experiment induced by COVID-19, the authors test how the sudden absence of fans at football games impacts player performance in Italy. They find that African players, who are most commonly targeted by racial harassment, play better when fans are no longer at the stadium. Using official records of racist behavior by fans, the authors show that performance improves the most on teams where such behavior was more common before the lockdown. Thus, racist pressure aimed at specific workers (players) appears to have reduced those workers’ productivity.
Christensen, Peter and Christopher Timmins 2023 “The Damages and Distortions from Discrimination in the Rental Housing Market”, The Quarterly Journal of Economics, forthcoming.
By constraining an individual’s choice during a search, housing discrimination distorts sorting decisions away from true preferences. Combining a large-scale field experiment with a residential sorting model, the authors show that key neighborhood amenities are associated with higher levels of discrimination. Counterfactual simulations based on the sorting model suggest that discrimination imposes damages equivalent to 4.4% and 3.5% of the annual incomes for African American and Hispanic/Latinx renters, respectively.
17: Setting Pay: Monopsony Models
Acemoglu, Daron, Alex X. He, and Daniel le Maire 2023 Eclipse of Rent-Sharing: The Effects of Managers’ Business Education on Wages and the Labor Share in the US and Denmark unpublished paper, MIT.
This paper provides evidence from the US and Denmark that managers with a business degree (“business managers”) reduce their employees’ wages. Within five years of the appointment of a business manager, wages decline by 6% and the labor share by 5 percentage points in the US, and by 3% and 3 percentage points in Denmark. Evidence from manager retirements, manager deaths, and an instrumental variables (IV) strategy all indicate that these effects are likely causal. Further, the authors use IV methods (based on role models) to show that these effects result from practices and values acquired in business education (not self-selection into business education.
17.c Standardized versus Individualized Pay
Massenkoff, Maxim, and Nathan Wilmers. 2023. "Wage Stagnation and the Decline of Standardized Pay Rates, 1974–1991." American Economic Journal: Applied Economics, 15 (1): 474-507.
Using new establishment-by-occupation microdata, the authors show that the use of discretionary wage setting significantly expanded in the 1970s and 1980s. Increasingly, wages for blue-collar workers were not standardized by job title or seniority but instead subject to managerial discretion. When establishments abandoned standardized pay rates, wages fell, particularly for the lowest-paid workers in a job and for those in establishments that previously paid above market rates. This shift away from standardized pay rates, in context of a broader decline in worker bargaining power, accelerated the decline in real wages experienced by blue-collar workers in the 1980s.
19.c Downsizing
Bertheau, Antoine, Marianna Kudlyak, Birthe Larsen, and Morten Bennedsen, 2023 Why Firms Lay Off Workers instead of Cutting Wages: Evidence from Matched Survey-Administrative Data Unpublished paper, University of Copenhagen.
The authors survey Danish employers about how they prefer to respond to adverse business shocks. Consistent with Bewley (1999), the employers report that they try to avoid cutting workers’ wages because of anticipated reductions in morale and productivity. The Danish employers’ responses also shed new light on why wage cuts are a poor substitute for layoffs: Because wage cuts raise turnover, both layoffs and wage cuts have similar employment effects, but with layoffs employers get to choose who departs. Consistent with the idea that employers’ motivations matter for worker morale, firms say that “a recession is an opportune time to lay off workers”. In recessions, employers can blame the layoffs on factors outside the firm’s control.
Tournaments
20.8-20.9: Tournaments with Risk-Averse Agents
Liu, Qi and Bo Sun 2023 Relative Wealth Concerns, Executive Compensation, and Managerial Risk-Taking American Economic Journal: Microeconomics 2023, 15(2): 568–598
Suppose that CEO’s care about their relative wealth (compared to other CEOs), not just their absolute wealth. How would we expect this to affect the types of contracts stockholders offer to CEOs? The authors show that in equilibrium, all firms might choose to pay CEOs for luck, in addition to paying for performance. This is because –if other firms are paying for luck—your own risk-averse CEO will value insurance against a compensation shortfall relative to their executive peers.
23.2: Gender, Confidence and Competitiveness
Dohmen, Thomas, Ingrid M.T. Rohde, and Tom Stolp
2023. Tournament
Incentives Affect Perceived Stress and Hormonal Stress Responses IZA DP No. 16025
The authors conduct a laboratory experiment among male participants to investigate whether tournament incentives induce more stress than a fixed payment scheme. Stress is measured over the entire course of the experiment at both the hormonal and psychological level. They find that tournament incentives induce a stress response whereas a fixed payment does not induce stress. However, neither perceived psychological stress nor elevated cortisol levels in a previous tournament predict a subsequent choice between tournaments and fixed payment schemes, indicating that stress induced by incentives schemes is not a relevant criterion for sorting decisions in our experiment.
De Sousa, José and Guillaume Hollard 2023. From Micro to Macro Gender Differences: Evidence from Field Tournaments Management Science, Vol. 69, No. 6: 3358-3399.
In chess tournaments, women compete worse against men in field tournaments in over 150 countries and across all ages. They find a ‘macro’ gender gap in every country: there are fewer female than male players, especially at the top, and women have lower average rankings. Comparing millions of individual games, they also find a small but robust ‘micro’ gender gap: women’s scores are about 2% lower than expected when playing a man rather than a woman with an identical rating, age and country. Using a simple theoretical model, they show how this small micro gap may affect women’s long-run human-capital formation. By reducing effort and increasing the probability of quitting, both effects accumulate to explain a larger share of the macro gap.
Teams
26.3.a Do Managers Matter? Evidence on Leadership
Sadun, Raffaella. 2023 CEOs and Firm Performance. NBer Reporter, number 1. (March)
In this review of her own research, Professor Sadun describes recent empirical work that generates direct evidence on what top managers do, how they differ from one another, and whether these differences matter for firms’ performance.
Acemoglu, Daron, Alex X. He, and Daniel le Maire 2023 Eclipse of Rent-Sharing: The Effects of Managers’ Business Education on Wages and the Labor Share in the US and Denmark unpublished paper, MIT.
This paper provides evidence from the US and Denmark that managers with a business degree (“business managers”) reduce their employees’ wages. Within five years of the appointment of a business manager, wages decline by 6% and the labor share by 5 percentage points in the US, and by 3% and 3 percentage points in Denmark. Evidence from manager retirements, manager deaths, and an instrumental variables (IV) strategy all indicate that these effects are likely causal. Further, the authors use IV methods (based on role models) to show that these effects result from practices and values acquired in business education (not self-selection into business education.