Opportunism in Capital Budget Recommendations: The Effects of Past Performance and Its Attributions*

This study uses an experiment to examine the separate and combined effects of managers' loss aversion and their causal attributions about their divisions' performance on tendencies to make goal‐incongruent capital budget recommendations. We find that managers' recommendations are biased by their loss aversion. In particular, managers of high‐performing divisions are more likely than managers of low‐performing divisions to propose investments that maximize their division's short‐term profits at the expense of the firm's long‐term value. We also find that managers' recommendations are biased by their causal attributions. In particular, managers are more likely to propose investments that maximize their division's short‐term profits at the expense of the firm's long‐term value when they attribute their division's performance to external causes (e.g., task difficulty or luck) rather than to internal causes (e.g., managerial ability or effort). Further, the effects of causal attributions are greater for managers of high‐performing divisions than for managers of low‐performing divisions. The study's findings are important because loss aversion and causal attributions are often manifested in firms. Thus, they may bias managers' decisions, which in turn may be detrimental to the firms' long‐term value.     

Social Security Wealth and Retirement Decisions in Italy

Abstract. This paper uses administrative data to study the retirement decisions of Italian private‐sector non‐agricultural employees during the period 1977–97. Our analysis tries to assess the importance of the financial incentives built into the social security system. The basic idea is very simple: at any given age, and based on the available information, workers compare the expected present value of two alternatives: retiring today or working one more year, and then choose the best one. A key role in this kind of comparisons is played by social security wealth, whose level and changes reflect the expectations about the profile of future earnings and the institutional features of the social security system. The various incentive measures that we consider differ in the precise weight given to the social security wealth that workers accrue as they continue to work. Our model does not provide a structural representation of the retirement process. A worker's decision is modeled here following a ‘quasi reduced‐form’ approach, with the incentive measures entering as predictors of the worker's choice in addition to standard variables. The estimated models are then used to predict retirement probabilities under alternative policies that change social security wealth and derived incentive measures.     

The Effects of Gain Sharing on the Basic Wage: The Case of IMPROSHARE

Although gain-sharing plans are typically promoted to workers as a way of increasing total compensation, workers are often concerned that gain-sharing bonuses may become substitutes for future wage increases that would have occurred in the absence of the plan. I examine the theoretical and empirical interaction among wages, bonuses, effort, and productivity in firms that implemented IMPROSHARE, a well-known gain-sharing plan. Using longitudinal data obtained from a detailed survey questionnaire, I find that one can usually reject both the perfectly competitive model in which effort is held constant (in which case bonuses are a perfect substitute for wages) and the “pure gravy” model (in which bonuses completely complement the wage rate). There is no evidence that higher bonuses lead to higher relative wages. The results, however, are not very robust. Although the net effect of the bonuses on the wage rate is usually negative, it is not always statistically significant.     

The effect of outside directors’ and auditors’ incentives on managers’ ability to manage cash bonuses

This paper investigates the impact of outside directors’ and auditors’ monetary incentives on the association between discretionary accounting and managers’ cash bonuses in a two-tier system. For a sample of German stock corporations from 2005 to 2007 we expect and find that outside directors who receive compensation based on accounting income and auditors who receive high non-audit fees have the incentive to tolerate managers’ bonus-increasing accounting choices. More specifically, we show that positive discretionary accruals are more strongly associated with managers’ cash bonuses than negative discretionary accruals if outside directors receive accounting-based compensation and/or if auditors receive high non-audit fees. Our results suggest that executives’ ability to manage their cash bonuses depends on the monitoring institutions’ monetary incentives.     

Directed Search for Equilibrium Wage–Tenure Contracts

I construct a theoretical framework in which firms offer wage–tenure contracts to direct the search by risk‐averse workers. All workers can search, on or off the job. I characterize an equilibrium and prove its existence. The equilibrium generates a nondegenerate, continuous distribution of employed workers over the values of contracts, despite that all matches are identical and workers observe all offers. A striking property is that the equilibrium is block recursive; that is, individuals' optimal decisions and optimal contracts are independent of the distribution of workers. This property makes the equilibrium analysis tractable. Consistent with stylized facts, the equilibrium predicts that (i) wages increase with tenure, (ii) job‐to‐job transitions decrease with tenure and wages, and (iii) wage mobility is limited in the sense that the lower the worker's wage, the lower the future wage a worker will move to in the next job transition. Moreover, block recursivity implies that changes in the unemployment benefit and the minimum wage have no effect on an employed worker's job‐to‐job transitions and contracts.     

TEAM INCENTIVES: EVIDENCE FROM A FIRM LEVEL EXPERIMENT

Many organizations rely on teamwork, and yet field evidence on the impacts of team‐based incentives remains scarce. Compared to individual incentives, team incentives can affect productivity by changing both workers’ effort and team composition. We present evidence from a field experiment designed to evaluate the impact of rank incentives and tournaments on the productivity and composition of teams. Strengthening incentives, either through rankings or tournaments, makes workers more likely to form teams with others of similar ability instead of with their friends. Introducing rank incentives however reduces average productivity by 14%, whereas introducing a tournament increases it by 24%. Both effects are heterogeneous: rank incentives only reduce the productivity of teams at the bottom of the productivity distribution, and monetary prize tournaments only increase the productivity of teams at the top. We interpret these results through a theoretical framework that makes precise when the provision of team‐based incentives crowds out the productivity‐enhancing effect of social connections under team production.     

The Effect of a Longer Eligibility to a Labour Market Programme for Dismissed Workers

Liste di Mobilità is an Italian programme targeted to dismissed workers. It combines a ‘passive’ and an ‘active’ component. Eligibility duration varies with the worker's age at dismissal. Using a new panel data set, we identify the impact of extending the duration of eligibility on re‐employment probabilities and wages, via Regression Discontinuity Design. We validate the design by a set of overidentification tests. For most subgroups we find no significant impact, with a peculiar pattern for women entitled to monetary benefits. A major negative impact emerges for workers aged 50 or more granted monetary benefits, likely due to the fact that they can use the programme as a bridge to retirement.     

The Influence of Top Management Teams in the Strategic Orientation and Performance of Small and Medium‐sized Enterprises

Identifying which factors affect firms' performance is a critical issue in strategic management research. This paper addresses the influence of managerial team over the behaviour and performance of small and medium‐sized enterprises (SMEs). By treating top management team (TMT) characteristics as predictors of a firm's strategic orientation, we seek to provide a more complete understanding of how the characteristics of managerial teams shape decision‐making processes and SMEs' behaviours in order to successfully compete in low munificent environments. Based on primary data regarding managerial characteristics and firms' behaviours of a sample of 295 SMEs, our results confirm that a firm's strategic orientation plays a mediating role in explaining how TMT characteristics determine SMEs' performance.     

On the Dynamics of Unemployment and Wage Distributions

Postel‐Vinay and Robin's (2002) sequential auction model is extended to allow for aggregate productivity shocks. Workers exhibit permanent differences in ability while firms are identical. Negative aggregate productivity shocks induce job destruction by driving the surplus of matches with low ability workers to negative values. Endogenous job destruction coupled with worker heterogeneity thus provides a mechanism for amplifying productivity shocks that offers an original solution to the unemployment volatility puzzle (Shimer (2005)). Moreover, positive or negative shocks may lead employers and employees to renegotiate low wages up and high wages down when agents' individual surpluses become negative. The model delivers rich business cycle dynamics of wage distributions and explains why both low wages and high wages are more procyclical than wages in the middle of the distribution.     

Network Positions and the Probability of Being Acquired: An Empirical Analysis in the Biopharmaceutical Industry

This paper examines the relationship between the firm's direct ties, its inter‐firm network prominence and its likelihood of being acquired. The authors argue that firm's direct ties and prominence enhance the firm's visibility and signal its quality – and thus foster the firm's likelihood of being acquired. However, higher levels of direct ties and prominence, by providing access to resources and the firm's status, respectively, increase the firm's ability to remain independent and thus reduce its likelihood of being acquired. Thus, the authors posit the overall relation as an inverted U‐shaped. Furthermore, they show that, for firms that undergo an initial public offering, the aforementioned relation becomes much weaker. The hypotheses are empirically tested in the biopharmaceutical industry and important theoretical and managerial implications are discussed.     

SOCIAL COMPARISON AND EFFORT PROVISION: EVIDENCE FROM A FIELD EXPERIMENT

Social comparison has potentially far reaching consequences in many economic domains. We conducted a field experiment to examine how social comparison affects workers' effort provision if their own wage or that of a co‐worker is cut. Workers were assigned to groups of two, performed identical individual tasks, and received the same performance‐independent hourly wage. Cutting both group members' wages caused a decrease in performance. But when only one group member's wage was cut, the affected workers decreased their performance more than twice as much as when both workers' wages were cut. This finding indicates that social comparison among workers affects effort provision because the only difference between the two wage‐cut treatments is the other group member's wage level. In contrast, workers whose wage was not cut but who witnessed their group member's pay being cut displayed no change in performance relative to the baseline treatment in which both workers' wages remained unchanged. This indicates that social comparison exerts asymmetric effects on effort.     

DOWNSIZING AND JOB INSECURITY

This article offers an explanation of why firms' downsizing patterns may vary substantially in magnitude and timing, taking the form of one‐time massive cuts, waves of layoffs, or zero layoff policies. The key element of this theory is that workers' expectations about their job security affect their on‐the‐job performance. In a situation where firms face adverse shocks, the productivity effect of job insecurity forces firms to balance laying off redundant workers and maintaining survivors' commitment. The cost of ensuring commitment differs between firms with different characteristics and determines whether workers are laid off all at once or in stages. However, if firms have private information about their future profits, they may not lay off any workers in order to signal a bright future, boosting worker's confidence. (JEL: J21, J23, D21, D82)     

IT'S WHAT YOU SAY,NOT WHAT YOU PAY: AN EXPERIMENTAL STUDY OF MANAGER‐EMPLOYEE RELATIONSHIPS IN OVERCOMING COORDINATION FAILURE

We study manager‐employee interactions in experiments set in a corporate environment where payoffs depend on employees coordinating at high effort levels; the underlying game being played repeatedly by employees is a weak‐link game. In the absence of managerial intervention subjects invariably slip into coordination failure. To overcome a history of coordination failure, managers have two instruments at their disposal: increasing employees' financial incentives to coordinate and communication with employees. Synthesizing methods drawn from psychology and economics, we quantify the impact of specific types of communication on workers' effort levels and manager's profits. This methodology allows us to rigorously compare the efficacy of communication and direct incentives in an environment where both are available. We find that communication is a more effective tool than incentive changes for leading organizations out of performance traps. Examining the content of managers' communication, the most effective communication strategy is quite simple: specifically request a high effort, point out the mutual benefits of high effort, and imply that employees are being paid well. (JEL: C92, D23, J31, L23, M52)     

A motivation and ability perspective on engagement in emerging digital technologies: The case of Internet of Things solutions

In this study, we advance two mechanisms that lead firms to engage in emerging digital technologies, namely, the dominant coalition's motivation and its ability to deploy the resources needed to pursue such motivation. Building on the performance and strategic development, and on board capital literature streams, we construe prior economic performance as a proxy of the firm's motivation, and human and social board capital as proxies of the firm's ability, analyzing their effect on adding emerging digital technologies, such as Internet of Things solutions, to the firm's resource base. Longitudinal analyses on a panel of Fortune 500 manufacturing firms between 2002 and 2012 reveal that these mechanisms highlight two important aspects of firm influence that can shape its digital technology behavior, explaining the heterogeneity and variability in firms engaging in emerging digital technologies.     

Perceptions of facial dominance,trustworthiness and attractiveness predict managerial pay awards in experimental tasks

Positive associations between physical attractiveness and employee reward are well-documented within the organisational literature. Although the impact of facial cues to trustworthiness and dominance on a number of social outcomes has been established outside of the workplace, the extent to which they, in addition to attractiveness, affect pay at different managerial levels is yet to be investigated. This paper presents research into this issue using a face payment task for shop floor managers (Retail Managers) and senior managers (Heads of Retail Operations). Evaluations indicated that all three facial cues were positively associated with awarded pay at both managerial levels. Moreover, attractiveness had a significantly stronger link with shop-floor managers' than senior managers' pay, whereas perceived trustworthiness and perceived dominance had significantly stronger links with pay for senior managers than shop-floor managers. It further emerged that women were paid more in this experimental task where pay was awarded solely based on facial features and that the facial features were more predictive of women's than men's pay. Awareness of the role of physical cues in pay awards can be considered by organisations to reduce biases in remuneration.     

经理声誉考虑、任务关联性和长期报酬激励的效果研究

为研究如何激励经理努力提高企业未来业绩,假设经理承担着两项任务:声誉激励其提高企业当前业绩,报酬激励其提高未来业绩;在多任务委托代理模型框架下,本文研究了声誉和长期报酬对经理提高未来业绩的激励效果.本文把企业业绩分为当期业绩和长期(即未来)业绩,并假设委托人目标是长期企业业绩最大化,而不是当期业绩最大化.同时本文对经理努力成本函数的假设有重大改进:给出了经理长期和短期努力的具体的成本函数形式,考虑了两种任务即努力间的关联性情况,假设长期努力和当期努力有不同的成本系数.目前相关模型的成本函数最多只能满足以上三个条件中的前两个.因此,运用本文多任务委托代理模型分析得出的结论更明确、直观,并且更符合实际.本文发现,经理不同努力的成本、两项任务之间的关联性对经理的努力行为选择有重要的影响,要激励经理提高企业长期业绩,应该减少经理长期努力的成本或者弱化当期激励.     

Managerial Self-efficacy and Managerial Performance

Some of the main features of Bandura's self-efficacy concept are presented. The importance of the concept to the work organization and to individual performance is discussed. A field study is described. The first part of the study involved the development of parallel versions of a scale to assess managerial self-efficacy. Data concerning the psychometric properties of the parallel version of the scale show that they are reliable and independent of social desirability. The second part of the study provided evidence of the relationships between scores on the managerial self-efficacy scale and supervisors’ ratings of managers’ performance. The results indicate that managerial self-efficacy correlates with work performance ratings.     

Technology-based total factor productivity and benchmarking: New proposals and an application

The present study fills a gap between the benchmarking literature and multi-output based efficiency and productivity studies by proposing a benchmarking framework to analyze total factor productivity (TFP). Different specifications of the Hicks–Moorsteen TFP index are tailored for specific benchmarking perspectives: (1) static, (2) fixed base and unit, and (3) dynamic TFP change. These approaches assume fixed units and/or base technologies as benchmarks. In contrast to most technology-based productivity indices, the standard Hicks–Moorsteen index always leads to feasible results. Through these specifications, managers can assess different facets of the firm's strategic choices in comparison with firm-specific relevant benchmarks and thus have a broad background for decision making. An empirical application for the Spanish banking industry between 1998 and 2006 illustrates the managerial implications of the proposed framework.     

Capital Budgeting for Volume Flexible Equipment*

Recent advances in technology have created opportunities for firms to invest in expensive automated equipment designed to improve volume flexibility. Such investments are made on the basis that flexibility benefits the firm by increasing managerial control over output, reducing the risk of demand uncertainty, and improving productivity. The presumption is that these benefits will eventually translate to higher cash flows, appreciation in the firm's market value, and better return to shareholders. Yet, there is no managerially useful analytical framework for measuring this relationship. This study develops a model that uses contingent claims analysis to evaluate the effect of volume flexibility on the firm's value and to determine the optimal degree of automation that maximizes share value. The analysis is done by taking into consideration alternative demand characteristics, cost patterns, and the effectiveness of volume flexibility in increasing managerial control over output, reducing the risk of demand uncertainty, and improving productivity.     

How Managers Talk about their Consumption of Popular Management Concepts: Identity,Rules and Situations

This paper analyses how top managers account for their consumption of popular management concepts. By ‘consumption’ we refer to managers acting as active users of popular management concepts within their organizations. After reviewing the relevant literature, we argue that the logic of appropriateness is a better theoretical perspective to view, understand and analyse managers' accounts of concept consumption than is the logic of consequence. We apply this perspective to extensive interviews we conducted with top managers in Germany. Based on the managers' own accounts of how they understand and apply popular management concepts, we identified four discourse categories: (1) learning from others' experiences, (2) controlling organizational change, (3) gaining external legitimacy and (4) collective sensemaking. We argue that these discourse categories all draw on the social norm of rationality central to managerial identity, while differing in socially defined rules about how rationality is realized in typical management situations. Our findings strongly encourage researchers, when investigating popular management concepts in the future, to take into account the situational nature of rationality that circumstantiates the consumption of concepts.