GENDER DIFFERENCES IN MOTIVATIONAL CROWDING OUT OF WORK PERFORMANCE

This paper shows that prior financial incentives induce a crowding‐out effect when incentives are discontinued. In our real‐effort experiment workers receive a piece rate before monetary incentives are substituted by a one‐time payment. In this case, workers' performance significantly drops when receiving the one‐time payment. The effect is driven by a fraction of men who reduce effort substantially, whereas women constantly perform well. We find that this motivational crowding‐out effect disappears when men do not have prior experience of a piece rate. In a series of control treatments, we discard several alternative explanations besides motivational crowding out. (JEL C91, J16, M54)     

PIECE‐RATE CONTRACTS FOR OTHER‐REGARDING WORKERS

When workers are paid with piece rates, inequality arises naturally. We consider workers who care about income comparisons and are either status seeking or inequality averse. We identify circumstances under which inequality attitudes lead workers to exert more effort than they would otherwise, and also circumstances under which workers’ inequality attitudes lead firms to set lower piece rates than they would otherwise. The key behavioral assumption for both of these results to hold when workers are identical is behindness aversion, the property that changes in inequality matter more to the worker when he is behind than when he is ahead. (JEL D01, J33, M52)     

DISAPPOINTMENT AVERSION AND SOCIAL COMPARISONS IN A REAL‐EFFORT COMPETITION

We present an experiment to investigate the source of disappointment aversion in a sequential real‐effort competition. Specifically, we study the contribution of social comparison effects to the disappointment aversion previously identified in a two‐person real‐effort competition (Gill, D., and V. Prowse. “A Structural Analysis of Disappointment Aversion in a Real Effort Competition.” American Economic Review, 102, 2012, 469–503). To do this we compare “social” and “asocial” versions of the Gill and Prowse experiment, where the latter treatment removes the scope for social comparisons. If disappointment aversion simply reflects an asymmetric evaluation of losses and gains we would expect it to survive in our asocial treatment. Alternatively, if losing to or winning against another person affects the evaluation of losses/gains, as we show would be theoretically the case under asymmetric inequality aversion, we would expect treatment differences. We find behavior in social and asocial treatments to be similar, suggesting that social comparisons have little impact in this setting. Unlike in Gill and Prowse we do not find evidence of disappointment aversion. (JEL C91, D12, D81, D84)     

SALARIES OR PIECE RATES: ON THE ENDOGENOUS MATCHING OF HARVEST WORKERS AND CROPS

The objective of this paper is to determine whether the choice of payment schemes (hourly vs. piece rates) is systematically related to the workers' risk aversion and ability. We derive the equilibrium relationship between agents' risk aversion and ability and the power of incentives (payment scheme) in a market where many heterogeneous principals and agents are endogenously matched. The equilibrium matching between principals and agents depends on the traits and is critical in determining the contract choice. Using confidential data from the National Agricultural Workers Survey (NAWS), we find evidence of matching between agricultural workers and the riskiness of their jobs (crops they harvest) based on workers' risk aversion and no matching based on ability. When controlling for matching, we find strong evidence that high risk‐averse workers choose hourly rates and low risk‐averse workers choose piece rates. We also found that high ability types choose piece rates and low ability types choose hourly rates but the evidence is weaker. (JEL J33, D82, Q12)     

DESPERATION OR DESIRE? THE ROLE OF RISK AVERSION IN MARRIAGE

Because of the uncertainty inherent in searching for a spouse and the uncertainty of the future quality and state of the marriage itself, risk attitudes likely directly impact the timing of marriage. The effect of an individual’s risk aversion, measured via a series of hypothetical gambles over income on time to marriage, is examined using survival analysis. I find risk aversion significantly affects time to marriage, with more risk averse respondents marrying sooner than their more risk‐loving counterparts. Within‐family analyses using sibling data reveal a similar pattern. In addition, the effect of risk aversion on time to marriage is larger in magnitude and more statistically significant for men. One possible explanation for the different results between the sexes is that women value risk aversion as a desirable trait in potential mates. (JEL J10, J11, J12, J16)     

SELF-SELECTION AND THE EFFICIENCY OF TOURNAMENTS

The literature has shown that the overall efficiency of exogenously imposed tournaments is reduced by a high variance in performance. This article reports results from an experiment analyzing whether allowing subjects to self-select into different payment schemes is reducing the variability of performance in tournaments. We show that when the subjects choose to enter a tournament instead of a piece-rate payment scheme, the average effort is higher and the between-subject variance is substantially lower than when the same payment scheme is imposed. Mainly based on risk aversion, sorting is efficiency enhancing since it increases the homogeneity of the contestants . ( JEL M52, J33, J31, C81, C91)     

RISK PREFERENCES AND EXPECTED UTILITY: EVIDENCE FROM LABOR SUPPLY DATA

This paper adds to the growing body of evidence that observed risk preferences are not consistent with expected‐utility theory. Using the link between labor supply decisions and utility as outlined by Chetty (“A Bound on Risk Aversion Using Labor Supply Elasticities.” The American Economic Review, 96(5), 2006, 1821–34), I compute the curvature of utility over wealth for 3,900 individuals in the 1996 Panel Study of Income Dynamics. I then compare this estimate to a measure of relative risk aversion based on the respondents' answers to hypothetical gambling questions and find virtually zero correlation. Finally, I investigate how the two measures and their correlations change by demographic groups and risky behavior. (JEL C81, D80, J22)     

ROBUSTNESS OF BIDDER PREFERENCES AMONG AUCTION INSTITUTIONS

In previous work, we found that bidders strongly prefer the ascending to the first‐price sealed‐bid auction on a ceteris paribus basis, but perhaps surprisingly, they are not willing to pay up to an entry price for the ascending auction that would equalize the profits. Risk aversion was proposed as an explanation. In this study, we examine two alternative explanations for the observed behavior: loss aversion and aversion to the dynamic bidding process. We find that neither alternative explanation can account for bidders’ auction choice behavior, leaving risk aversion as the only unfalsified hypothesis. (JEL C91, D44)     

Domain specificity of fairness judgments in economic transactions

Two studies eliciting fairness judgments about hypothetical economic transactions examined whether fairness judgments were influenced by who was being judged. The first study replicated the results of Kahneman et al. (Am. Econom. Rev. 76 (1986a) 728–741; J. Business 59 (1986b) S285–S300) that people judge certain actions by firms as unfair, but it also demonstrated that people judge parallel actions by individuals as fair. The second study suggested that people apply different standards to individuals and firms because of presumed differences between them in wealth, power, and size. When firms were portrayed as no more powerful or wealthy than individuals, differences in fairness judgments were eliminated. Further, respondents were less inclined to judge the behavior of a firm harshly as perpetrator of an unfair act when the firm was identified with an individual than when it was large and anonymous, and they were more inclined to judge the behavior of an individual harshly as perpetrator of an unfair act when the action injured a firm with a clearly identified individual than when the firm was large and anonymous.     

Intersecting Lorenz Curves, the Degree of Downside Inequality Aversion, and Tax Reforms

This paper clarifies the conceptual distinction of downside inequality aversion (or transfer sensitivity) as a normative criterion for judging income distributions from the Pigou-Dalton principle of transfers. We show that when the Lorenz curves of two income distributions intersect, how the change from one distribution to the other is judged by an inequality index exhibiting downside inequality aversion often depends on the relative strengths of its downside inequality aversion and inequality aversion. For additive inequality indices or their monotonic transformations, a measure characterizing the strength of an index’s downside inequality aversion against its inequality aversion is shown to determine the ranking by the index of two distributions whose Lorenz curves cross once. The precise condition under which the same result generalizes to the case of multiple-crossing Lorenz curves is also identified. The results are particularly useful in understanding the distributional impact of tax reforms. I received exceptionally helpful comments from Mike Hoy, Peter Lambert, the Editor, Buhong Zheng, and an anonymous referee. The remaining errors and shortcomings are my own – W.H. Chiu     

LOSS AVERSION AND MANAGERIAL DECISIONS: EVIDENCE FROM MAJOR LEAGUE BASEBALL

Previous research indicates that management changes are important events for organizations, partly because they lead to reversals of poor prior decisions. An unanswered question is why replacing the manager seems to be necessary for reversing poor decisions. One explanation is that managers have an irrational behavioral aversion to admitting mistakes (loss aversion). We test this hypothesis with a research design that mitigates many of the measurement problems associated with investment decisions in traditional corporate settings, and that allows us to distinguish agency cost from loss aversion as explanations. Using Major League Baseball data, we find that new managers, compared to continuing managers, are more likely to divest low‐performing players. Moreover, when the manager is new and the previous manager was responsible for acquiring a player who is underperforming, the likelihood of player divestiture is significantly higher relative to low performers acquired by earlier managers. Experience of the acquiring manager does not affect the likelihood that the manager retains a low performer, suggesting that it is loss aversion, and not career concerns, that motivates acquiring managers to retain low performers. The findings suggest that loss aversion plays a significant role in managerial decisions and managerial turnover. (JEL J6, L8, D8)     

WHAT MOTIVATES POLITICAL PREFERENCES? SELF‐INTEREST,IDEOLOGY, AND FAIRNESS IN A LABORATORY DEMOCRACY

Substantial prior literature has established that subjects in laboratory experiments are typically willing to sacrifice their own well being to make financial allocations more equal among participants. We test the applicability of this result in an environment that contains some of the key contextual issues that are usually excluded from more abstract games, but which might be important in situations involving income redistribution. Our general finding is that votes for a redistributive tax are almost entirely in accordance with self‐interest: above‐average earners vote for low tax rates and below‐average earners vote for high tax rates. A measure of subjects' preferences for fairness or equality, their self‐reported economic ideology, is not directly related to their voting behavior in this experiment. Because the ideology measure should be correlated with any intrinsic preferences regarding inequality aversion, we conclude that any preferences for fairness or inequality that our subjects possess are not strong enough to overcome self‐interest in this context. We do, however, find evidence for a possible indirect effect of ideology on choice behavior in that more conservative subjects tend to be more responsive to their self‐interest than the more liberal subjects. (JEL C90, D63)     

AFTER THE TOURNAMENT: OUTCOMES AND EFFORT PROVISION

Outcomes of workplace competitions may themselves influence subsequent behavior—particularly if employees feel wronged. In a laboratory experiment, we find that—consistent with inequity aversion—tournament losers supply less postcompetition effort than winners when doing so reduces their tournament opponent's earnings. Consistent with procedural fairness concerns, subjects who lose arbitrarily decided tournaments that disregard tournament effort choices supply even less post‐tournament effort than other losers. While losers' effort reductions consistent with inequity aversion persist, effort reductions following arbitrarily decided tournaments fade over time. Finally, we show that effort reductions related to inequity aversion could potentially be mitigated through workplace rotations. (JEL C90, J30, D03)     

INCOME INEQUALITY: THE CONSEQUENCES OF SKILL‐UPGRADING WHEN FIRMS HAVE HIERARCHICAL ORGANIZATIONAL STRUCTURES

During the last three decades, most developed countries have experienced increasing income inequality. Using Danish register data from 1992 to 2007 for all private‐sector employees, we confirm that income inequality has increased in Denmark. We also observe an increase in the relative employment of highly educated individuals, as well as differential income growth rates across employee subgroups where, in particular, managers experienced significant real income progression. We use an equilibrium search framework with on‐the‐job search to study the interplay between skill‐upgrading, management compensation, and income inequality. In this model we can determine the management and education premia. We can also show that when our model is exposed to skill‐upgrading, it is capable of producing income dynamics similar to those observed in the Danish income distribution. (JEL J3, J6, M5)     

Comparing degrees of inequality aversion

We propose a straightforward dominance procedure for comparing social welfare orderings (SWOs) with respect to the degree of inequality aversion they express. Three versions of the procedure are considered, each of which uses a different underlying criterion of inequality comparisons: (i) a concept based on the Lorenz quasi-ordering, which we argue to be the ideal version, (ii) a concept based on a minimalist criterion of inequality, and (iii) a concept based on the relative differentials quasi-ordering. It turns out that the traditional Arrow–Pratt approach is equivalent to the latter two concepts for important classes of SWOs, but that it is profoundly inconsistent with the Lorenz-based concept. With respect to the problem of combining extreme inequality aversion and monotonicity, concepts (ii) and (iii) identify as extremely inequality averse a class of SWOs that includes leximin as a special case, whereas the Lorenz-based concept (i) concludes that extreme inequality aversion and monotonicity are incompatible.     

Cultural capital or relative risk aversion? Two mechanisms for educational inequality compared1

In this paper we empirically examined two explanatory mechanisms for educational inequality: cultural reproduction and relative risk aversion, using survey data taken from secondary school pupils in Amsterdam. Cultural reproduction theory seeks to explain class variations in schooling by cultural differences between social classes. Relative risk aversion theory argues that educational inequalities can be understood by between-class variation in the necessity of pursuing education at branching points in order to avoid downward mobility. We showed that class variations in early demonstrated ability are for a substantial part cultural: cultural capital - measured by parental involvement in highbrow culture - affected school performance at the primary and secondary level. However, relative risk aversion - operationalized by being concerned with downward mobility - strongly affects schooling ambitions, whereas cultural capital had no effect. Thus, we conclude that 'primary effects' of social origin on schooling outcomes are manifested through cultural capital and not through relative risk aversion (in addition to other potential sources of class variations such as genetics). Relative risk aversion, and not cultural capital, affects schooling ambitions, which is relevant for our understanding of secondary effects.     

OPTIMAL EMPLOYEE OWNERSHIP CONTRACTS UNDER AMBIGUITY AVERSION

The aim of this paper is to compute and describe the conditions of an optimal employee ownership contract between an employer and an ambiguity‐averse employee. We then introduce ambiguity aversion in the baseline model of Aubert et al. (2014) using the multiple prior preferences of Gilboa and Schmeidler (1989) and its extension proposed by Maccheroni et al. (2006). This model offers solutions that reconcile labor and financial economics and behavioral economics research findings on employee ownership. The paper focuses on the most common situation where employee ownership has a positive impact on corporate performance, but can also be used as an entrenchment mechanism. We determine the optimal company stock contribution, which corresponds to a perfect subgame Nash equilibrium in the ambiguity framework. Using the framework of Gilboa and Schmeidler (1989), we show that the optimal ownership contract is increasing with respect to the lower bound of the return expectation in the case of a high level of effort, and decreasing with respect to the upper bound of the return expectation in the case of a low level of effort. In the framework of Maccheroni et al. (2006), we prove that if aversion to ambiguity is sufficiently high, then we find the same behavior as in the case of no ambiguity. (JEL G11, G32, G34, J33)     

THE IMPACT OF PRIVATE AND PUBLIC FEEDBACK ON WORKER PERFORMANCE—EVIDENCE FROM THE LAB

Previous empirical studies have demonstrated the positive incentive effects of private performance feedback as well as public recognition on work performance. In our laboratory experiments, we directly compare these two feedback schemes. Moreover, we compare their incentive effects across two real‐effort tasks that differ in regard to how interesting the subjects perceive working on them. We find that both feedback schemes lead to performance increases compared to the tasks' respective control treatments. In particular subjects' ability and a positive interim feedback enhance performance. Competitive preferences significantly affect performance only in the less enjoyable and challenging task. (JEL C9, J3, M1)     

GENDER DIFFERENCES IN EXAMINATION BEHAVIOR

A unique examination strategy in first‐year microeconomics courses is used to test for gender differences in examination behavior. Students have the possibility of attaining a seminar bonus on the final exam for near‐perfect seminar attendance and are given two voluntary initial quizzes during the semester. At the final exam, the scores received on initial quizzes can either be accepted as is, or students can attempt to improve their marks by answering similar quiz questions on the exam. Results suggest that female students are more likely to take initial quizzes and receive a seminar bonus but are less likely to re‐take quiz questions on the final exam. These results suggest higher risk aversion, less overconfidence, and more self‐discipline or less procrastination among female students relative to male students. Our estimated behavioral differences may have important implications in terms of final grades on the course. (JEL I21, J16, A12, A14)     

IS THERE A “DOUBLE BONUS” FROM REDUCING INEQUALITY?

We study the effect of inequality on growth in an overlapping generations (OLG) model where inequality affects growth through accumulation of human capital and endogenous fertility. In contrast to much of the existing literature, we argue that the effect of inequality on growth might be non‐monotonic. Our model suggests that the effect depends on the demographic stage of development: inequality impedes growth in low‐fertility (high human capital) economies, but enhances growth in high‐fertility (low human capital) economies. Our finding casts doubt on a “double bonus” from reducing inequality in developing countries which are typically characterized by high fertility. (JEL O40, J13, O15)