Essays on Behavioral Labor Economics

ESSAYS ON BEHAVIORAL ECONOMICS SEPTEMBER 2010 PHILIP PABLO MELLIZO, B.A., UNIVERSITY OF WYOMING M.A., UNIVERSITY OF MASSACHUSETTS AMHERST Ph.D., UNIVERSITY OF MASSACHUSETTS AMHERST Directed by: Professor Peter Skott and Professor Jeffrey Carpenter Overview Economists typically understand the firm as an organization comprised of a series of incomplete contracts among input suppliers (e.g. Coase, (1937), Williamson, (1985)). The ultimate right to make decisions that are not subject to a pre-existing contractual arrangement – hereafter referred to as decision-control rights, are assigned to some person or group associated with the enterprise. The entity with decision-control rights has the final say over how to organize essential firm operations that range from the determination of production techniques, to deciding how to monitor or compensate the firm's members. To 1 As an example, if management is held accountable by all of the laborers (or shareholders as the case vii the extent that firm members have competing interests or are asymmetrically affected by such decisions, those members with decision-control rights may be confronted with important normative issues regarding which firm objectives should be pursued. In my dissertation, I employ a behavioral economic perspective in order to examine how workplace governance practices interact with both the level of satisfaction and motivation of workers. In the first essay of the dissertation, I collected data from a real-effort experiment to compare changes in the performance of research participants that were subjected to an identical set of wage incentives that were either implemented (1) endogenously by the group to which subjects belong through a simple majority vote, (2) endogenously by only one member of the group who had all decision-control rights, or (3) a random process completely exogenous to the group. The 3 (3 distinct decision-control rights regimes) X 2 (2 distinct incentive contracts) between-subjects design allows for a clean comparison of performance under different decision-control rights treatments. I report evidence suggesting that the decision-control rights arrangement used to select the compensation contract can significantly influence the subsequent level of performance of research subjects. may be) in the firm insofar that they can override or replace management of the firm, then the decisioncontrol rights are ultimately held by labor and not the management. viii The second essay (co-authored with Michael Carr), analyzes the relative effects of voice, autonomy, and wages in explaining job satisfaction using subjective evaluations of work conditions and satisfaction recorded in the 2004 wave of the Workplace Employment Relations Survey (WERS). We show that the amount of autonomy and voice that a worker has over the firm is an important omitted variable, biasing the estimated coefficient on the wage upwards. And, conditional upon having a job, voice and autonomy are considerably more important determinants of job satisfaction than the wage. The final essay offers a critique of the traditional economics of work organization in consideration of the literature developed in behavioral and experimental economics. I argue that many models of worker motivation developed using the rational choice model (RCM) carry the cost of ignoring common sentiments and behaviors that have been systematically demonstrated in experimental studies. After providing an extensive review of the experimental economics literature as it may inform various workplace organizational faculties, I conclude that the literature suggests that establishment of work teams and incentive schemes that reward teams for collective success would carry the expectation of sustained satisfaction and productivity of workers more than firm environments that rely on employee competition as a motivational device.