Essays in Behavioral Labor and Welfare Economics

ESSAYS IN BEHAVIORAL LABOR AND WELFARE ECONOMICS BY ALEKSANDR ALEKSEEV AUGUST 2018 Committee Chair: Dr. James C. Cox Major Department: Economics In my dissertation, I study three questions in behavioral labor and welfare economics using experimental methods: what is the role of task difficulty on effort, how to measure ability and motivation in a more rigorous way, and what are the economic consequences of stochastic choice in a risk setting. In the first chapter, I study the effect of task difficulty on workers’ effort and compare it to the effect of monetary rewards in a tightly controlled laboratory experiment. I find that task difficulty has an inverse-U effect on effort, and that this effect is quantitatively large when compared to the effect of conditional rewards. Difficulty acts as an important mediator of monetary rewards: they are most effective at the medium level of difficulty. I show that the inverse-U pattern of effort response to difficulty is not consistent with the Expected Utility model but is consistent with the Rank-Dependent Utility (RDU) model that allows for probability weighting. I structurally estimate the RDU model and find that it fits the data well. These findings suggests that 1) task difficulty is a useful and costless tool to stimulate effort, 2) to elicit the maximum amount of effort, the task has to be reasonably challenging, and 3) the design of optimal incentive schemes for workers should take into account task difficulty. In the second chapter, I develop a novel method for estimating ability and motivation from the outcomes and response time on a cognitive test. The proposed method is based on a dynamic stochastic model of optimal effort choice that features a psychologically plausible mechanism of decision-making. In a laboratory experiment, I find substantial heterogeneity among subjects in terms of their estimated ability and motivation that is partially attributed to their demographic characteristics and preferences. Test scores turns out to be a very imprecise measure of true ability. The observed variation in test scores is mostly due to variation in motivation rather than ability. I find no association between estimated measures of ability and motivation and their self-reported counterparts. Looking at the relative importance of ability versus motivation on the success on a cognitive task, I find that motivation plays a slightly bigger role than ability. In the third chapter, which is a joint work with Dr. Glenn W. Harrison, Dr. Morten Lau and Dr. Don Ross, we study the welfare costs of stochastic choice. Theoretical work on stochastic choice mainly focuses on the sources of choice randomness, and less on its economic consequences. We attempt to close this gap by developing a method of extracting information about the monetary costs of noise from structural estimates of preferences and choice randomness. Our method is based on allowing a degree of noise in choices in order to rationalize them by a given structural model. To illustrate the approach, we consider risky binary choices made by a sample of the general Danish population in an artefactual field experiment. The estimated welfare costs are small in terms of everyday economic activity, but they are considerable in terms of the actual stakes of the choice environment. Higher welfare costs are associated with higher age, lower education, and lower income. ESSAYS IN BEHAVIORAL LABOR AND WELFARE ECONOMICS BY ALEKSANDR ALEKSEEV A Dissertation Submitted in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy in the Andrew Young School of Policy Studies of Georgia State University GEORGIA STATE UNIVERSITY 2018 Copyright by Aleksandr Alekseev 2018