nep-hrm New Economics Papers
on Human Capital and Human Resource Management
Issue of 2012‒04‒10
sixteen papers chosen by
Tommaso Reggiani
Universita' di Bologna

  1. Sorting on the labour market: A literature overview and theoretical framework By Hornig, Stephan O.; Rottmann, Horst; Wapler, Rüdiger
  2. What Drives the Urban Wage Premium? Evidence along the Wage Distribution By Alessia Matano; Paolo Naticchioni
  3. The pitfalls of work requirements in welfare-to-work policies: Experimental evidence on human capital accumulation in the Self-Sufficiency Project By Riddell, Chris; Riddell, Craig
  4. Performance Pay, CEO Dismissal, and the Dual Role of Takeovers By Mike Burkart; Konrad Raff
  5. Explaining the Structure of CEO Incentive Pay with Decreasing Relative Risk Aversion By Pierre Chaigneau
  6. Work and Wage Dynamics around Childbirth. By Ejrnæs, Mette; Kunze, Astrid
  7. Revisiting system theories in Strategic Human Resource Management - A set-theoretic analysis of high performing firms in the UK By Johannes Meuer; Henric van der Ent
  8. The discreet charm of the collective contract By Chong, Sophia; Guillen, Pablo
  9. A Fair Wage Model of Unemployment with Inertia in Fairness Perceptions By George Chouliarakis; Monica Correa-Lopez
  10. The Allocation of a Prize (R) By Pradeep Dubey; Siddhartha Sahi
  11. The effect of risk preferences on the valuation and incentives of compensation contracts By Pierre Chaigneau
  12. Winner-Take-All and Proportional-Prize Contests: Theory and Experimental Results. By Roman M. Sheremeta; William A. Masters; Timothy N. Cason
  13. Do Private Equity Managers Earn Their Fees? Compensation, Ownership, and Cash Flow Performance By David T. Robinson; Berk A. Sensoy
  14. When Performance Trumps Gender Bias: Joint versus Separate Evaluation By Bohnet, Iris; van Geen, Alexandra; Bazerman, Max H.
  15. The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance By Robert G. Eccles; Ioannis Ioannou; George Serafeim
  16. Incentives from stock option grants: a behavioral approach By Hamza Bahaji

  1. By: Hornig, Stephan O.; Rottmann, Horst; Wapler, Rüdiger
    Abstract: In the literature there are basically two main approaches that explain the positive link between the level of education and wages: the human-capital theory and the signalling/screening (collectively known as sorting) theory. We highlight the similarity and differences between these theories and present a general theoretical model of screening with productivity-enhancing effects of education from which we derive four empirically testable hypothesis. -- In der Literatur sind zwei Theorien zur Erklärung des positiven Zusammenhangs zwischen dem Bildungsniveau und dem Lohn vorherrschend: die Human Kapital-Theorie und die Signaltheorie. Wir beschreiben die Gemeinsamkeiten und Unterschiede beider Theorien und präsentieren ein allgemeines theoretisches Signal-Modell mit produktivitätserhöhenden Effekten der Bildung. Anhand diesem Modell entwickeln wir vier Hypothesen, die empirisch getestet werden können.
    Keywords: human-capital theory,signalling,screening
    JEL: J24 J31
    Date: 2011
  2. By: Alessia Matano; Paolo Naticchioni (Sapienza University of Rome Italy.)
    Abstract: This paper aims at disentangling the role played by different theoretical explanations in accounting for the urban wage premium along the wage distribution. We analyze the wage dynamics of migrants from low-to-high-density areas in Italy, using quantile regression and individual panel data to control for the sorting of workers. The results show that skilled workers enjoy a higher wage premium when they migrate (wage level effect), in line with the agglomeration externalities explanation, while unskilled workers benefit more from a wage premium accruing over time (wage growth effect). Further, investigating the determinants of the wage growth effect in greater depth, we find that for unskilled workers the wage growth is mainly due to human capital accumulation over time, consistently with the “learning” hypothesis, while for skilled workers it is the “coordination” hypothesis that matters.
    Keywords: Urban Wage Premium, Human Capital, Spatial Sorting, Wage Distribution, Quantile Fixed Effects
    JEL: J31 J61 R23
    Date: 2012
  3. By: Riddell, Chris; Riddell, Craig
    Abstract: This paper investigates whether policies that encourage recipients to exit welfare for full-time employment influence participation in educational activity. The Self-Sufficiency Project (‘SSP’) was a demonstration project where long-term welfare recipients randomly assigned to the treatment group were offered a generous earnings supplement if they exited welfare for full-time employment. We find that treatment group members were less likely to upgrade their education along all dimensions: high-school completion, enrolling in a community college or trade school, and enrolling in university. Thus, ‘work-first’ policies that encourage full-time employment may reduce educational activity and may have adverse consequences on the long-run earnings capacity of welfare recipients. We also find that there was a substantial amount of educational upgrading in this population. For instance, among high-school dropouts at the baseline, 19% completed their diploma by the end of the demonstration. Finally, we simulate the consequences of the earnings supplement in the absence of adverse effects on educational upgrading. Doing so alters the interpretation of the lessons from the SSP demonstration.
    Keywords: welfare policy, human capital, experimental methods, earnings supplementation
    JEL: I38 J08 J24
    Date: 2012–03–31
  4. By: Mike Burkart; Konrad Raff
    Abstract: We propose that an active takeover market provides incentives by o¤ering acqui- sition opportunities to successful managers. This allows ?rms to reduce performance- based compensation and can rationalize loss-making acquisitions. At the same time, takeovers remain a substitute for board dismissal in the replacement of poorly per- forming managers. The joint impact of the two mechanisms on managerial turnover is, however, multi-faceted: In ?rms with strong boards, turnover and performance- based pay are non-monotonic in the intensity of the takeover threat. In ?rms with weak boards, turnover (performance-based pay) increases (decreases) with the in- tensity of the takeover threat. When choosing its acquisition policy and the quality of its board, each ?rm ignores the adverse e¤ect on other ?rms?acquisition oppor- tunities and takeover threat. As a result, the takeover market is not su¢ ciently liquid and too few takeovers occur.
    Date: 2011–11
  5. By: Pierre Chaigneau
    Abstract: It is established that the standard principal-agent model cannot explain the structure of commonly used CEO compensation contracts if CRRA preferences are postulated. However, we demonstrate that this model has potentially a high explanatory power with preferences with decreasing relative risk aversion, in the sense that a typical CEO contract is approximately optimal for plausible preference parameters.
    Date: 2011–10
  6. By: Ejrnæs, Mette (University of Copenhagen); Kunze, Astrid (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: This study investigates how the first childbirth affects the wage processes of women who are well-established in the labour market. We estimate a flexible …fixed-effects wage regression model extended by post-childbirth…fixed effects. We use register data on West Germany and exploit the expansionary family policy during the late 1980s and 1990s for identification. On their return to work after childbirth, mothers’wages drop by 3 to 5.7 per cent per year of leave. We find negative selection back to full-time work after childbirth. We discuss policy implications regarding statistical discrimination and results concerning the family gap.
    Keywords: Wages; parental leave; human capital; control function.
    JEL: C23 J24 J31
    Date: 2012–02–29
  7. By: Johannes Meuer (Department of Business Administration, University of Zurich and Rotterdam School of Management, Erasmus University); Henric van der Ent (Rotterdam School of Management, Erasmus University)
    Abstract: Prior research has produced ambiguous support for theories on the nature and construction of Human Resource Management (HRM) systems. This ambiguity may be a function of the inherent limitations of the methodologies used in previous studies. We resume efforts by using a configurational methodology to analyze high performing HRM systems of 374 UK based firms. We reveal the multi-dimensional nature of successful and unsuccessful HRM systems. By providing a typology for comparing the interdependencies among vital and peripheral functions, we are able to describe and explain competitive advantages that rest in the orchestrating themes and integrative mechanisms of HRM systems.
    Keywords: Strategic HRM, Organizational configurations, fsQCA
    JEL: O15 L22
    Date: 2012–03
  8. By: Chong, Sophia; Guillen, Pablo
    Abstract: We compare individual with collective contracts using variations of a repeated gift- exchange game. Firms consist of one employer and three workers. In the individual variation (I) different workers can receive separate wages. In the collective variation (C) workers receive the same wage. I and C are played altering the order across sessions resulting in four treatments: 1I, 1C, 2I, 2C. The wage offered in the first period of 1C is significantly higher than the wage offered in the first period of 1I. Average wage and effort become indistinguishable in phase 1 afterwards. Individual contracts resulted on higher average effort but undistinguishable wages when comparing 2I with 2C. In spite of an experimental design favourable to individual contracts, collective contracts fared unexpectedly well .
    Keywords: collective contracts; gift exchange; laboratory experiments
    Date: 2012–02
  9. By: George Chouliarakis; Monica Correa-Lopez
    Abstract: Theories of psychology and empirical evidence suggest that the reference transactions against which workers judge fairness exhibit inertia. This paper shows that a fair-wage model with inertia in fairness perceptions provides a plausible explanation for the observed negative correlation between changes in productivity growth and equilibrium unemployment over the medium run, a stylized fact that remains elusive to most other classes of models. It also shows that skillbiased productivity shocks and shocks to workers’ taste for equal pay have permanent effects on unemployment and the skill premium. Thus, skill-biased shocks to productivity increase unemployment among the lowskilled while, if high-skilled workers are less inequity-averse, they reduce unemployment among the high-skilled.
    Keywords: Fairnesss; Unemployment; Skill Premium; Fair Wage-Effort Hypothesis; Inequity Aversion; Personnel Management
    JEL: D03 E24 J31 M12
    Date: 2012–03
  10. By: Pradeep Dubey (Center for Game Theory, Department of Economics, Stony Brook University); Siddhartha Sahi (Dept. of Mathematics, Rutgers University, New Brunswick)
    Abstract: Consider agents who undertake costly effort to produce stochastic outputs observable by a principal. The principal can award a prize deterministically to the agent with the highest output, or to all of them with probabilities that are proportional to their outputs. We show that, if there is sufficient diversity in agents' skills relative to the noise on output, then the proportional prize will, in a precise sense, elicit more output on average, than the deterministic prize. Indeed, assuming agents know each others' skills (the complete information case), this result holds when any Nash equilibrium selection, under the proportional prize, is compared with any individually rational selection under the deterministic prize. When there is incomplete information, the result is still true but now we must restrict to Nash selections for both prizes. We also compute the optimal scheme, from among a natural class of probabilistic schemes, for awarding the prize; namely that which elicits maximal effort from the agents for the least prize. In general the optimal scheme is a monotonic step function which lies "between" the proportional and deterministic schemes. When the competition is over small fractional increments, as happens in the presence of strong contestants whose base levels of production are high, the optimal scheme awards the prize according to the "log of the odds," with odds based upon the proportional prize.
    Keywords: Deterministic/proportional/optimal prizes, Games of complete/incomplete information, Nash equilibrium, Individually rational strategies
    JEL: C70 C72 C79 D44 D63 D82
    Date: 2012–04
  11. By: Pierre Chaigneau
    Abstract: We use a comparative approach to study the incentives provided by dierent types of compensation contracts, and their valuation by risk averse managers, in a fairly general setting. We show that concave contracts tend to provide more incentives to risk averse managers, while convex contracts tend to be more valued by prudent managers. Thus, prudence can contribute to explain the prevalence of stock-options in executive compen- sation. We also present a condition on the utility function which enables to compare the structure of optimal contracts associated with dierent risk preferences.
    Date: 2012–01
  12. By: Roman M. Sheremeta (Argyros School of Business and Economics, Chapman University); William A. Masters (Department of Food and Nutrition Policy, Tufts University); Timothy N. Cason (Department of Economics, Krannert School of Management, Purdue University)
    Abstract: This study provides a unified theoretical and experimental framework in which to compare three canonical types of competition: winner-take-all contests won by the best performer, winner-take-all lotteries where probability of success is proportional to performance, and proportional-prize contests in which rewards are shared in proportion to performance. We introduce random noise to reflect imperfect information, and collect independent measures of risk aversion, other-regarding preferences, and the utility of winning a contest. The main finding is that efforts are consistently higher with winner-take-all contests. The lottery contests have the same Nash equilibrium as proportional prizes, but induce contestants to choose higher efforts and receive lower, more unequal payoffs. This result may explain why contest designers who seek only to elicit effort offer lump-sum prizes, even though contestants would be better off with proportional rewards.
    Keywords: contests, rent-seeking, lotteries, incentives in experiments, risk aversion
    JEL: C72 D72 D74 J33
    Date: 2012
  13. By: David T. Robinson; Berk A. Sensoy
    Abstract: We study the relation between compensation practices, incentives, and performance in private equity using new data that connect ownership structures, management contracts, and quarterly cash flows for a large sample of buyout and venture capital funds from 1984-2010. Although many critics of private equity argue that PE firms earn excessive compensation and have muted performance incentives, we find no evidence that higher compensation or lower managerial ownership are associated with worse net-of-fee performance, in stark contrast to other asset management settings. Instead, compensation is largely unrelated to net-of-fee cash flow performance. Nevertheless, market conditions during fundraising are an important driver of compensation, as pay rises and shifts to fixed components during fundraising booms. In addition, the behavior of distributions around contractual triggers for fees and carried interest is consistent with an underlying agency conflict between investors and general partners. Our evidence is most consistent with an equilibrium in which compensation terms reflect agency concerns and the productivity of manager skills, and in which managers with higher compensation earn back their pay by delivering higher gross performance.
    JEL: G00 G23 G24 G34
    Date: 2012–03
  14. By: Bohnet, Iris (Harvard University); van Geen, Alexandra (Harvard University); Bazerman, Max H.
    Abstract: We examine a new intervention to overcome gender biases in hiring, promotion, and job assignments: an "evaluation nudge," in which people are evaluated jointly rather than separately regarding their future performance. Evaluators are more likely to focus on individual performance in joint than in separate evaluation and on group stereotypes in separate than in joint evaluation, making joint evaluation the money-maximizing evaluation procedure. Our findings are compatible with a behavioral model of information processing and with the System 1/System 2 distinction in behavioral decision research where people have two distinct modes of thinking that are activated under certain conditions.
    JEL: C91 D03
    Date: 2012–03
  15. By: Robert G. Eccles; Ioannis Ioannou; George Serafeim
    Abstract: We investigate the effect of a corporate culture of sustainability on multiple facets of corporate behavior and performance outcomes. Using a matched sample of 180 companies, we find that corporations that voluntarily adopted environmental and social policies by 1993 – termed as High Sustainability companies – exhibit fundamentally different characteristics from a matched sample of firms that adopted almost none of these policies – termed as Low Sustainability companies. In particular, we find that the boards of directors of these companies are more likely to be responsible for sustainability and top executive incentives are more likely to be a function of sustainability metrics. Moreover, they are more likely to have organized procedures for stakeholder engagement, to be more long-term oriented, and to exhibit more measurement and disclosure of nonfinancial information. Finally, we provide evidence that High Sustainability companies significantly outperform their counterparts over the long-term, both in terms of stock market and accounting performance. The outperformance is stronger in sectors where the customers are individual consumers, companies compete on the basis of brands and reputation, and in sectors where companies’ products significantly depend upon extracting large amounts of natural resources.
    JEL: G3 M14
    Date: 2012–03
  16. By: Hamza Bahaji (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris IX - Paris Dauphine)
    Abstract: This paper examines the incentives from stock options for loss-averse employees subject to probability weighting. Employing the certainty equivalence principle, I built on insights from Cumulative Prospect Theory (CPT) to derive a continuous time model to value options from the perspective of a representative employee. Consistent with a growing body of empirical and experimental studies (Lambert and Larcker, 2001; Hodge et al., 2006), the model predicts that the employee may overestimate the value of his options in-excess of their risk-neutral value. This is nevertheless in stark contrast with a common finding of standard models based on the Expected Utility Theory (EUT) framework that options value to a risk-averse undiversified employee is strictly lower than the value to risk-neutral outside investors. In particular, I proved that loss aversion and probability weighting have countervailing effects on the option subjective value. In addition, for typical setting of preferences parameters around the experimental estimates (Tversky and Kahneman, 1992; Abdellaoui, 2000), and assuming the company is allowed to adjust existing compensation when making new stock option grants, the model predicts that incentives are maximized for strike prices set around the stock price at inception. This finding is consistent with companies' actual compensation practices that standard EUT-based models have difficulties accommodating their existence. The paper also examines the relationship between risk taking incentives and stock options and finds that an executive who is subject to probability weighting may be more prompted than a risk-neutral executive to act in order to increase the firm's assets volatility.
    Keywords: Stock options, Cumulative Prospect Theory, Incentives, Subjective value.
    Date: 2011–05–13

This nep-hrm issue is ©2012 by Tommaso Reggiani. 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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