Quarterly Personnel Update-- 2022_09
Peter Kuhn
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The Principal-Agent Problem
5.5: Multi-task Principal-Agent Interactions
On Job Design:
Gerten, Elisa. Michael Beckmann and Matthias Kräkel 2022 “Information and Communication Technology, Hierarchy, and Job Design” IZA discussion paper no. 15491
Do advances in information and communication technology (ICT) lead to more centralization or more decentralization in firms? The authors’ theoretical and empirical analyses show that equipping employees with ICT has more complex effects that differ across positions. Executive employees are granted more work autonomy but also experience more control via stronger monitoring, while non-executive employees experience more monitoring without receiving more work autonomy.
5.6: Nonlinear Incentives and Timing Gaming
Du, Longyuan, Ming Hu, and Jiahua Wu (2021) Sales Effort Management Under All-or-Nothing Constraint. Management Science 68(7):5109-5126.
Consider a salesperson who chooses effort each day, and who receives a lump sum bonus if her total sales exceed a predetermined target at the end of the month. Daily sales are subject to random uncertainty. Deciding how much hard to work each day (as a function of realized sales to date) is quite a complex problem. The authors solve this problem when sales follow a Poisson distribution, showing that optimal effort is highest when sales-to-date are neither “too high” nor “too low”. If sales-to-date are too low, the bonus is effectively ‘out of reach’ this month; if sales-to-date are too high, the bonus can be attained even with low effort.
Effects of non-linear incentives on risk-taking:
Chevalier, Judith, and Glenn Ellison. "Risk taking by mutual funds as a response to incentives." Journal of Political Economy 105.6 (1997): 1167- 1200.
The authors document an increasing, convex relationship between a mutual fund’s performance and the inflow of money people invest in the fund. This non-linear relationship creates incentives for fund managers to increase or decrease a fund’s riskiness, depending on the fund’s year-to-date return. The authors then show that mutual funds respond to these incentives by changing the riskiness of their portfolios as the end of the year approaches.
Shue, Kelly, and Richard R. Townsend. 2017 "How do quasi-random option grants affect CEO risk-taking?." The Journal of Finance 72.6: 2551-2588.
Option grants to CEOs are a highly non-linear incentive, whose expected effect on CEO risk-taking depends on the CEO’s risk aversion. The authors use quasi-random variation in option grants to CEOs to show that, on net, option grants increase CEO risk-taking, as measured by equity volatility.
de Figueiredo Jr, Rui JP, Evan Rawley, and Orie Shelef. "Bad bets: Nonlinear incentives, risk, and performance." Strategic Management Journal (2019).
The authors study how incentive slope and shape (concavity versus convexity) affects risk-taking by hedge fund managers. Their results suggest that poor performance in the industry is often due to bad bets—excessive risk-taking that reduces performance—taken in response to nonlinear incentives. The findings suggest that, although nonlinear incentives are widely used, they can, under certain circumstances, predictably produce pernicious effects on organizational performance.
6. Optimal Monitoring
Battiston, Diego, Jordi Blanes i Vidal, Tom Kirchmaier and Katalin Szemeredi 2022 “Peer Pressure and Manager Pressure in Organisations” unpublished paper, University of Edinburgh.
The authors study how peer pressure among workers interacts with the pressure they receive from their immediate superiors. In a natural experiment at a large organization, individuals work in an open-plan space and, for reasons exogenous to their productivity, their adjacent desks become occupied / unoccupied by co-workers throughout their shift. They identify a causal, sharp and persistent increase in worker’s productivity following the occupation of an adjacent desk. The authors also study how this ‘peer pressure’ effect interacts with monitoring by managers, arguing that peer pressure is a mechanism used by managers to indirectly influence their workers. exert pressure on their subordinates.
Kantor, Jodi and Arya Sundaram “The Rise of the Worker Productivity Score” New York Times, August 14, 2022
Across industries and incomes, more employees are being tracked, recorded and ranked. What is gained, companies say, is efficiency and accountability. What is lost?
Boudreau, Laura E., Sylvain Chassang, Ada Gonzalez-Torres, and Rachel M. Heath 2022 Monitoring Harassment in Organizations unpublished paper, Columbia University.
Harassment at work can be hard to monitor because perpetrators want to hide it and victims fear retaliation. The authors assess a technique known as garbled survey methods to monitor harassment in a phone-based survey of workers at apparel manufacturing plants in Bangladesh. “Garbling” harnesses the reports of many people but offers individual victims plausible deniability that they made a report. The authors find that garbling increases reporting of sexual harassment by about 306%, physical harassment by 295%, and threatening behavior by 56%. Based on these findings and other patterns in the data, they draw implications for decision-makers.
Working from Home:
Aksoy, Cevat Giray, Jose Maria Barrero,
Nicholas Bloom, Steven J. Davis, Mathias Dolls, and Pablo Zarate 2022 Working from Home Around
the World NBER working paper number 30446
The authors survey full-time workers who finished primary school in 27 countries to document large, lasting increases in working from home during and after the pandemic. Among other findings, most were favorably surprised by their WFH productivity during the pandemic. The authors draw on their results to explain the big shift to WFH and to consider some implications for workers, organization, cities, and the pace of innovation.
Evidence on Employee Motivation
9.2 Intrinsic, Symbolic and Image Motivation
Awards:
Imas, Alex and Kristóf Madarász 2022 Superiority-Seeking
and the Preference for Exclusion NBER working paper no. 30334
The authors propose that a person’s desire to consume an object or possess an
attribute increases in how much others want but cannot have it. They call this
motive superiority-seeking, and study its implications for large variety of
behaviors. In the context of personnel
economics, superiority-seeking could explain why people value non-monetary
awards for good performance simply because the awards are scarce.
9.5-9.6: Loss Aversion and Reference Points
Chapman, Jonathan, Erik Snowberg, Stephanie W. Wang, and Colin Camerer 2022. Looming Large or Seeming Small? Attitudes Towards Losses in a Representative Sample NBER working paper no. 30243
The authors measure individual-level loss aversion using three incentivized, representative surveys of the U.S. population (combined N=3,000). Contrary to many previous findings —which mostly come from lab/student samples— the authors find that around 50% of the U.S. population is loss tolerant, not loss-averse. The authors reconcile their findings with previous literature by showing that loss aversion is more prevalent in people with high cognitive ability. These results raise questions about applying loss-aversion-based models to workers who are, for example, not college educated.
10.6 Trust and the Cost of Control
Ederer, Florian and Frédéric Schneider Trust and Promises over Time American Economic Journal: Microeconomics 2022, 14(3): 304–320
Using a large-scale experiment, the authors investigate how communication and the passage of time affects trust. Communication (predominantly through promises) raises cooperation, trust, and trustworthiness by about 50 percent. This result holds even after three weeks, suggesting that the passage of this amount of time does not reduce trust or trustworthiness or affect how people communicate.
10.7 Fairness Among Workers
Jones, Melanie
K. and Ezgi Kaya 2022
Organisational
Gender Pay Gaps in the UK: What Happened Post-transparency? IZA discussion paper no.
15342
The authors study gender pay gaps before and after 2017, when the UK
required large employers to publicly report their gender pay gap each year. They
find greater narrowing of gender pay gaps in organizations with a larger
initial gender pay gap. Moreover, this relationship is magnified over time,
consistent with gradual and longer-term adjustment.
On Peer Effects:
Battiston, Diego, Jordi Blanes i Vidal, Tom Kirchmaier and Katalin Szemeredi 2022 “Peer Pressure and Manager Pressure in Organisations” unpublished paper, University of Edinburgh.
The authors study how peer pressure among workers interacts with the pressure they receive from their immediate superiors. In a natural experiment at a large organization, individuals work in an open-plan space and, for reasons exogenous to their productivity, their adjacent desks become occupied / unoccupied by co-workers throughout their shift. They identify a causal, sharp and persistent increase in worker’s productivity following the occupation of an adjacent desk. The authors also study how this ‘peer pressure’ effect interacts with monitoring by managers, arguing that peer pressure is a mechanism used by managers to indirectly influence their workers. exert pressure on their subordinates.
Selection
12. Choosing Qualifications (classical input demand theory)
Kokkodis, Marios and Sam Ransbotham 2022 “Learning to Successfully Hire in Online Labor Markets” Management Science, forthcoming.
Analysis of 238,364 hiring decisions from a large online labor market shows that employers often experiment with certain types of workers, then adjust their hiring focus with experience. Specifically, employers often initially explore cheaper contractors with a lower reputation. When these options result in unsuccessful outcomes, employers learn and adjust their hiring behaviors to rely more on reputable contractors who are not as cheap. Such hiring tends to be successful, guiding employers to reinforce their hiring processes.
15: Choosing from the Pool: Testing, Discretion, and Self-Selection
Self-selection:
Tsui, David and Marshall Vance 2022 “Sorting Effects of Broad-Based Equity Compensation” Management Science, forthcoming.
The standard principal-agent model predicts that broad-based equity compensation should be ineffective in motivating workers due to free-rider problems. Broad-based equity compensation could, however, still benefit management if it affects worker selection: which workers join the firm and remain committed to it? Using detailed employee-level data, the authors argue that broad-based equity pay attracts workers with higher trust in management, with potentially positive consequences for profitability.
16.1 Detecting Discrimination
Haegele, Ingrid. 2022 “The Broken Rung: Gender and the Leadership Gap” unpublished paper, UC Berkeley.
To help understand why women are underrepresented in corporate leadership positions, the author uses data from a large multinational firm that combines detailed personnel records with the universe of internal application and job vacancies. She show that women at lower hierarchy levels are 29% less likely to apply for promotions. No such gaps exist among employees who already hold leadership positions, indicating the presence of a broken (bottom) rung rather than a glass ceiling. Large-scale surveys at the firm reveal that taking on leadership of a team is much less appealing to women than men at lower hierarchy levels. This difference cannot be explained by gender differences in family status, risk preferences, or confidence.
Benson, Alan, and Louis-Pierre LePage 2022 “Learning to Discriminate on the Job” unpublished paper, University of Minnesota.
Using administrative records from a large national US retailer, the authors find that managers learn to discriminate ``on the job'' as they gain experience hiring workers of different races. First, they find that idiosyncratically positive and negative previous experiences with Black hires seed the race of future hires, consistent with managers updating their beliefs about the productivity of these workers based on their hiring history. Second, the degree of updating is larger for Black than White workers, consistent with managers having weaker priors. Third, because positive experiences increase black hiring and negative ones decrease it, negative biases are slower to self-correct than positive ones. Fourth, these dynamics, combined with the fact that black workers are already in a minority, yield particularly large and protracted declines in Black hiring following a manager's negative experiences. The results suggest that managers develop biased beliefs from endogenous learning about racial groups, which systematically disadvantages minority workers.
16.3 Effects of Discrimination
Adams-Prassl, Abi, K. Huttunen, E. Nix & N. Zhang. 2022 Violence Against Women at Work: Victim and Firm Effects unpublished paper, Oxford University.
Between-colleague conflicts are common. The authors link every police report in Finland to administrative data to identify assaults between colleagues, and economic outcomes for victims, perpetrators, and firms. They document large, persistent labor market impacts of between-colleague violence on victims and perpetrators. Male perpetrators experience substantially weaker consequences after attacking women compared to men. Perpetrators' economic power in male-female violence partly explains this asymmetry. Male-female violence causes a decline in women at the firm. There is no change in within-network hiring, ruling out supply-side explanations via "whisper networks". Only male-managed firms lose women. Female managers do one important thing differently: fire perpetrators.
17: Setting Pay: Monopsony Models
Dube, Arindrajit, Suresh Naidu, and Adam D. Reich “Power
and Dignity in the Low-Wage Labor Market: Theory and Evidence from Wal-Mart
Workers” NBER working paper no. 30441
Using survey experiments of Walmart employees, the authors measure workers’ hypothetical quit elasticities, and find that workers have an economically significant willingness to pay for “dignity at work". They also find that workers at low-dignity jobs have higher quit elasticities, compared to workers at high-dignity jobs.
Teams
26.3 Moderate Complementarity
Do Managers Matter? Evidence on Leadership
Giardili, Soledad, Kamalini Ramdas, and Jonathan W. Williams 2022 Leadership and Productivity: A Study of U.S. Automobile Assembly Plants Management Science, forthcoming.
The authors study the effect of plant managers on productivity in U.S. auto-assembly plants during 1993–2007. Using data from managers who switched plants, they find, first, that there are substantial differences in managers’ productivity. Plant managers also learn from plant-specific experience, i.e. their performance improves the longer they remain at the same plant.
Thanks for your attention!
Note: The article descriptions in these updates are not copies of the authors’ abstracts. While they may use text from those abstracts (and/or the article), they are my own summaries that (a) endeavor to be shorter than most abstracts, and (b) attempt to place the article in the broader context of personnel economics as a field. I hope that you will find them helpful.