nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2007‒08‒18
six papers chosen by
Marco Novarese
University of the Piemonte Orientale

  1. The Effect of External Incentives on Profits and Firm-Provided Incentives Strategy By Azar, Ofer H.
  2. Cue-Triggered Addiction and Natural Recovery By Chiara MOcenni; Giuseppe Montefrancesco; Silvia Tiezzi
  3. Made in Italy as a collective belief.A model of investment in stereotypes By Nicolò Bellanca; Giovanni Canitano
  4. Linking leadership empowerment behavior to employee attitudes and behavioral intentions: testing the mediating role of psychological empowerment By Dewettinck, K.; van Ameijde, M.
  5. The effect of relative thinking on firm strategy and market outcomes: A location differentiation model with endogenous transportation costs By Azar, Ofer H.
  6. Incentives and Service Quality in the Restaurant Industry: The Tipping – Service Puzzle By Azar, Ofer H.

  1. By: Azar, Ofer H.
    Abstract: The article examines the firm's choice of incentives when workers face additional incentives (“external incentives”) to those provided by the firm, such as building reputation that improves the workers' prospects with other employers, or satisfaction from working well. Surprisingly, the firm might find it optimal to increase the incentives it provides following an increase in external incentives. Even if the firm reduces its incentives, however, total incentives unambiguously increase, leading to higher effort and profits. This implies that firms should try to increase the external incentives that their workers face; I suggest several ways firms can do so.
    Keywords: Worker satisfaction; Personnel economics; External incentives; Worker reputation; Intrinsic motivation
    JEL: D21 L20 J30 M52 M20
    Date: 2003
  2. By: Chiara MOcenni; Giuseppe Montefrancesco; Silvia Tiezzi
    Abstract: In this paper we propose a model of natural recovery, a widespread yet unexplained aspect of addictive behavior, starting from the recent theory developed by Bernheim and Rangel (2004). While the Bernheim and Rangel model generates many distinctive patterns of addiction, it does not explicitly consider pathways to natural recovery. Based on insights from neurosciences, we introduce an ”implicit cognitive appraisal” process depending on past experiences as well as on future expected consequences of addictive consumption. Such function affects the individual in two ways: it erodes the payoff from use as the decision maker grows older and it increases the cognitive control competing with the hedonic impulses to use, thus reducing the probability of making mistakes. While we do recognize the importance of allowing for cue-triggered mistakes in individual decision making, our model recovers an important role for cognitive processes, such as subjective cost-benefit evaluations, in explaining natural recovery.
    Keywords: Addiction models, natural recovery, behavioral economics,cognitive policy, neuroscience.
    JEL: C61 D11 I12
    Date: 2007–06
  3. By: Nicolò Bellanca (Università degli Studi di Firenze, Dipartimento di Scienze Economiche); Giovanni Canitano (Università degli Studi di Firenze, Dipartimento di Scienze Economiche)
    Abstract: This paper interprets for the fist time the phenomenon of the made in Italy as a collective belief. First, a conceptual framework is proposed for analysing the formation and evolution of collective beliefs, by characterizing precisely the way individuals are expected to behave in this respect. Then, we argue that different paths may end up provoking the emergence of a collective belief, and maintain that the made in Italy can be though of as the case of a collective belief about the inventive and creative Italian way of producing a specific set of goods. Afterwards, we point to the investment in public rituals as the way to actively foster this collective belief, and then interpret such process as an economic problem of providing a public good. We highlight the main collective action implications of such analysis, by modelling individuals’ behaviour in different settings. The analysis is focused on those characteristics that make the made in Italy a special public good, such as joint private benefits, asymmetries between agents, accession costs, and transaction costs. Finally, policy and institutional implications are explored, in terms of redistribution, proactive subsidization, and contract design.
    Keywords: collective beliefs, public rituals, impure public goods
    JEL: D21 H41 R38
    Date: 2007
  4. By: Dewettinck, K.; van Ameijde, M. (Vlerick Leuven Gent Management School)
    Abstract: To improve their overall flexibility and efficiency, many organisations have replaced traditional hierarchical management structures with empowered (semi-autonomous or self-managing) work teams. Managers, once charged with directing and controlling work, are now asked to take on a new set of roles and responsibilities in order to lead these teams (Lawler, 1992). Arnold and colleagues (2000) identified five categories of empowering leadership behavior and constructed and validated a scale for measuring those behaviors. We build on their work by investigating how these behaviors relate to employee attitudes and behavioral intentions. We do so by developing a model in which psychological empowerment (Spreitzer, 1995, 1996; Thomas & Velthouse, 1990) mediates the relationship between empowering leadership behavior and employee job satisfaction and affective organizational commitment. We also modeled the relationship between these employee attitudes and intention to stay as a final outcome variable. Based on a sample of 381 service employees from four companies, we empirically tested this model using structural equation modeling in AMOS. Our results show that psychological empowerment is partially mediating the relationship between perceived empowering leadership behavior and employee job satisfaction and affective commitment. This indicates that perceived leadership behavior does relate toe employee attitudes through its impact on employee motivation. However, leadership behavior also shows to be directly related to employee attitudes, which in turn are strongly related to an employee's intention to stay working for the organisation. Implications for theory and managerial practice are discussed.
    Date: 2007–08–10
  5. By: Azar, Ofer H.
    Abstract: Consumers often have to decide whether to go to a remote store for a lower price. Only the absolute price difference between the stores should be relevant in this case, but several experiments showed that people exhibit "relative thinking": they are affected also by the relative savings (relative to the good's price). This article analyzes the effects of this bias on firm strategy and market outcomes using a two-period game-theoretic model of location differentiation. Relative thinking causes consumers to make less effort to save a constant amount when they buy more expensive goods. In the location differentiation context this behavior can be modeled by consumers who behave as if their transportation costs are an increasing function of the good's price. This gives firms an additional incentive to raise prices, in order to increase the perceived transportation costs of consumers, which consequently softens competition and allows higher profits. Therefore, the response of firms to relative thinking raises prices and profits and reduces consumer surplus, in both periods. Total welfare is unchanged in the first period, and in the second period it is either unchanged or reduced, depending on whether the objective or subjective transportation costs are used to compute welfare. The main results of the model (firms' response to relative thinking increases prices and reduces consumer surplus) are likely to hold also in the context of search. The article also explains why "relative thinking" is a more appropriate term than "mental accounting" (which was often used before) to describe this behavior, and discusses why people might exhibit relative thinking.
    Keywords: Competitive Strategy; Relative Thinking; Pricing; Mental Accounting; Consumer Psychology; Consumer Attitudes & Behavior; Cognitive Processes; Behavioral Decision Making; Industrial Organization; Product Differentiation.
    JEL: D10 M31 L10 L13 D43
    Date: 2007
  6. By: Azar, Ofer H.
    Abstract: Tipping is a significant economic activity (tips in the US food industry alone amount to about $42 billion annually) that was claimed to improve service quality and increase economic efficiency, because it gives incentives to provide excellent service, and therefore allows to avoid costly monitoring of workers. The article suggests that this common wisdom might be wrong. A simple model shows formally that tips can improve service only if they are sensitive enough to service quality. Empirical evidence suggests that tips are hardly affected by service quality. Nevertheless, rankings of service quality by customers are very high; the co-existence of these two findings is denoted "the tipping – service puzzle,” and several possible explanations for it are offered.
    Keywords: Tipping; Service quality; Social norms; Waiters; Restaurants; The hospitality industry
    JEL: Z13 D10 L80 J30 M50 A12
    Date: 2005

This nep-cbe issue is ©2007 by Marco Novarese. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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