nep-hrm New Economics Papers
on Human Capital and Human Resource Management
Issue of 2013‒04‒13
twenty papers chosen by
Tommaso Reggiani
University of Cologne

  1. Bonus Culture: Competitive Pay, Screening, and Multitasking By Bénabou, Roland; Tirole, Jean
  2. Economic Development and the Organization of Production By Ananth Seshadri; Nicolas Roys
  3. Do entrepreneurs matter? By Becker, Sascha O.; Hvide, Hans K
  4. Gaming and Strategic Ambiguity in Incentive Provision By Ederer, Florian; Holden, Richard; Meyer, Margaret A
  5. Employee recognition and performance: A field experiment By Bradler C.; Non J.A.; Neckermann S.; Dur R.
  6. Using Performance Incentives to Improve Medical Care Productivity and Health Outcomes By Gertler, Paul; Vermeerch, Christel
  7. Pay-for-Performance Incentives in Low- and Middle-Income Country Health Programs By Grant Miller; Kimberly Singer Babiarz
  8. Literacy at South African Mission Stations By Johan Fourie; Robert Ross; Russel Viljoen
  9. Strategic Framing in Contracts By Katharina Hilken; Kris De Jaegher; Marc Jegers
  10. Motivating Knowledge Agents: Can Incentive Pay Overcome Social Distance? By Erlend Berg; Maitreesh Ghatak; R Manjula; D Rajasekhar; Sanchari Roy
  11. Banker compensation and bank risk taking: the organizational economics view By Arantxa Jarque; Edward S. Prescott
  12. Do French firms use financial participation to transfer more risk to their workers? By Leila Baghdadi; Rihab Bellakhal; Marc-Arthur Diaye
  13. The Relationship Between Delegation and Incentives Across Occupations: Evidence and Theory By DeVaro, Jed; Prasad, Suraj
  14. Rational Inattention and Organizational Focus By Dessein, Wouter; Galeotti, Andrea; Santos, Tano
  15. Wage Growth and Human Capital in the UK Finance Sector By Joanne Lindley
  16. Are all High-Skilled Cohorts Created Equal? Unemployment, Gender, and Research Productivity By John P. Conley; Ali Sina Onder; Benno Torgler
  17. Race-Specific Agglomeration Economies: Social Distance and the Black-White Wage Gap By Elizabeth Ananat; Shihe Fu; Stephen L. Ross
  18. Social-Origin Inequalities in Educational Careers in Italy. Performance or Decision Effects? By Contini Dalit; Scagni Andrea
  19. Environment, Health, and Human Capital By Joshua Graff Zivin; Matthew Neidell
  20. Human capital, tangible wealth, and the intangible capital residual By Hamilton, Kirk; Liu, Gang

  1. By: Bénabou, Roland; Tirole, Jean
    Abstract: This paper analyzes the impact of labor market competition and skill-biased technical change on the structure of compensation. The model combines multitasking and screening, embedded into a Hotelling-like framework. Competition for the most talented workers leads to an escalating reliance on performance pay and other high-powered incentives, thereby shifting effort away from less easily contractible tasks such as long-term investments, risk management and within-firm cooperation. Under perfect competition, the resulting efficiency loss can be larger than that imposed by a single firm or principal, who distorts incentives downward in order to extract rents. More generally, as declining market frictions lead employers to compete more aggressively, the monopsonistic underincentivization of low-skill agents first decreases, then gives way to a growing overincentivization of high-skill ones. Aggregate welfare is thus hill-shaped with respect to the competitiveness of the labor market, while inequality tends to rise monotonically. Bonus caps and income taxes can help restore balance in agents' incentives and behavior, but may generate their own set of distortions.
    Keywords: adverse selection; bonuses; competition; contracts; executive compensation; Hotelling; incentives; inequality; moral hazard; performance pay; screening; work ethic
    JEL: D31 D82 D86 J31 J33 L13 M12
    Date: 2013–04
  2. By: Ananth Seshadri (University of Wisconsin); Nicolas Roys (University of Wisconsin Madison)
    Abstract: How important is managerial talent in accounting for cross country income differences? We address this question using a model that distinguishes between workers human capital and managers human capital. In our model, the ablest people leverage their talent and this has important consequences for a country’s standard of livings. A key object for the existing literature argument is the returns to schooling. Once we distinguish between workers and managers: returns to schooling appear as profits rather than wages. We consider an overlapping generations economy where each individual chooses to be a manager or a worker depending on its human capital (as in Lucas, 1978), individual accumulate human capital both in school and on the job (as in Ben-Porath, 1967), and production occurs in teams where there is sorting between workers and managers (as in Garicano and Rossi-Hansberg, 2006). By nesting a model of managerial occupational choice and endogenous skill accumulation in a framework in which the span of control is endogenous, we develop a rich framework that yields a number of empirical implications. We find that (1) aggregate output is more sensitive to managerial talent than worker talent, (2) the span of control of managers is constrained by workers human capital, and (3) small variations in human capital can have large effects on wages and profits so that incentives to accumulate human capital at the top of the distribution are large. We calibrate the model to the US economy and show that it can rationalize simultaneously the life-cycle of wages of managers and workers as well as the life-cycle of firms. We then ask how much variations do we need to account for output per capita differences? Preliminary results show that modest distortions can lead to large income differences.
    Date: 2012
  3. By: Becker, Sascha O.; Hvide, Hans K
    Abstract: In the large literature on firm performance, economists have given little attention to entrepreneurs. We use deaths of more than 500 entrepreneurs as a source of exogenous variation, and ask whether this variation can explain shifts in firm performance. Using longitudinal data, we find large and sustained effects of entrepreneurs at all levels of the performance distribution. Entrepreneurs strongly affect firm growth patterns of both very young firms and for firms that have begun to mature. We do not find significant differences between small and larger firms, family and non-family firms, nor between firms located in urban and rural areas, but we do find stronger effects for founders with high human capital. Overall, the results suggest that an often overlooked factor -- individual entrepreneurs -- plays a large role in affecting firm performance.
    Keywords: entrepreneurship; firm performance; human capital
    JEL: D21 D24 G39 J23 L11 L25
    Date: 2013–01
  4. By: Ederer, Florian; Holden, Richard; Meyer, Margaret A
    Abstract: It is often suggested that incentive schemes under moral hazard can be gamed by an agent with superior knowledge of the environment, and that deliberate lack of transparency about the incentive scheme can reduce gaming. We formally investigate these arguments. Ambiguous incentive schemes induce more balanced efforts from an agent who performs multiple tasks and is better informed about the environment, but also impose more risk on the agent. If tasks are sufficiently complementary for the principal, ambiguous schemes can dominate the best deterministic scheme and can completely eliminate the efficiency losses from the agent's better knowledge of the environment.
    Keywords: ambiguity; contracts; gaming; incentives; randomization
    JEL: L13 L22
    Date: 2013–01
  5. By: Bradler C.; Non J.A.; Neckermann S.; Dur R. (ROA)
    Abstract: This paper reports the results from a controlled field experiment designed to investigate the causal effect of public recognition on employee performance. We hired more than 300 employees to work on a three-hour data-entry task. In a random sample of work groups, workers unexpectedly received recognition after two hours of work. We find that recognition increases subsequent performance substantially, and particularly so when recognition is exclusively provided to the best performers. Remarkably, workers who did not receive recognition are mainly responsible for this performance increase. This result is consistent with workers having a preference for conformity.
    Date: 2013
  6. By: Gertler, Paul; Vermeerch, Christel
    Abstract: We nested a large-scale field experiment into the national rollout of the introduction of performance pay for medical care providers in Rwanda to study the effect of incentives for health care providers. In order to identify the effect of incentives separately from higher compensation, we held constant compensation across treatment and comparison groups – a portion of the treatment group’s compensation was based on performance whereas the compensation of the comparison group was fixed. The incentives led to a 20% increase in productivity, and significant improvements in child health. We also find evidence of a strong complementarity between performance incentives and baseline provider skill.
    Keywords: Health Services/Allied Health/Health Sciences, General, Public Health, Performance Incentives, Results-Based Financing, Pay-for-Performance, Child Health, Maternal and Child Services
    Date: 2013–02–12
  7. By: Grant Miller; Kimberly Singer Babiarz
    Abstract: This chapter surveys experience with performance pay in developing country health programs. In doing so, it focuses on four key conceptual issues: (1) What to reward, (2) Who to reward, (3) How to reward, and (4) What unintended consequences might performance incentives create. We highlight that the use of performance pay has outpaced growth in corresponding empirical evidence. Moreover, very little research on performance incentives studies the underlying conceptual issues that we outline. We consider these to be important constraints in the design of better performance incentives.
    JEL: H51 I12 O12 O17
    Date: 2013–04
  8. By: Johan Fourie (Department of Economics, University of Stellenbosch); Robert Ross (Deapertments of History, Universities of Leiden and South Africa); Russel Viljoen (Department of History, University of South Africa)
    Abstract: Measures of education quality – primarily, years of schooling or literacy rates – are widely used to ascertain the contribution of human capital formation to long-run economic growth and development. This paper, using a census of 4,678 mission station residents, documents for the first time literacy and numeracy rates of non-white citizens in nineteenth-century South Africa. The 1849 census allows for an investigation into how the mission stations influenced the growth of literacy in the Cape Colony. We find that age, gender, duration of residence, whether the individual arrived at the station after the emancipation of slaves or was born there and, importantly, which missionary society was operating the station, matter for literacy performance. The results offer new insights into the comparative performance of missionary societies in South Africa and contribute to the debate about the role of missionary societies in the development of a colonial society.
    Keywords: human capital, South Africa, missionary, literacy, age-heaping
    JEL: N37
    Date: 2013
  9. By: Katharina Hilken; Kris De Jaegher; Marc Jegers
    Abstract: We provide a hidden-action principal-agent model where the agent has reference- dependent preferences. The loss-averse agent considers the base wage as reference point, and bonuses and/or penalties as gains and losses, respectively. When choosing optimal payments, the principal strategically sets the base wage, knowing that this determines the agent's reference point. We consider two variants of the model. In a first variant, the agent's reservation utility is not reference-dependent. We show that it is always optimal in this case for the principal to employ bonuses. In a second variant, the reservation utility is reference-dependent and the principal may use penalties.
    Keywords: Strategic Framing; Reference-Dependent Preferences; Principal-Agent Theory; Optimal Payment Schemes; Employment Contracts
    JEL: D86 D03 J33 M52
    Date: 2013–03
  10. By: Erlend Berg; Maitreesh Ghatak; R Manjula; D Rajasekhar; Sanchari Roy
    Abstract: This paper studies the interaction of incentive pay and social distance in the dissemination of information. We analyse theoretically as well as empirically the effect of incentive pay when agents have pro-social objectives, but also preferences over dealing with one social group relative to another. In a randomised field experiment undertaken across 151 villages in South India, local agents were hired to spread information about a public health insurance programme. Relative to at pay, incentive pay improves knowledge transmission to households that are socially distant from the agent, but not to households similar to the agent.
    Keywords: public services, information constraints, incentive pay, social proximity, knowledge transmission
    JEL: C93 D83 I38 M52 O15 Z13
    Date: 2013–03
  11. By: Arantxa Jarque; Edward S. Prescott
    Abstract: Models of banks operating under limited liability with deposit insurance and employee incentive problems are used to analyze how banker compensation contracts can contribute to bank risk shifting. The first model is a multi-agent, moral-hazard model, where each agent (e.g. a loan officer) operates a risky lending technology. Results differ from the single-agent model; pay for performance contracts do not necessarily indicate risk at the bank level. Correlation of returns is the most important factor. If loan officer returns are uncorrelated, the form of pay is irrelevant for risk. If returns are correlated, a low wage causes risk. If correlation is endogenous, relative performance contracts that encourage correlation of returns can create bank risk. A sufficient condition for a contract to induce risk at the bank level is provided. The second model adds a loan review and risk management function that affects risk characteristics of loan officers' loans. Counter to common perception, paying loan reviewers and risk managers for performance does not necessarily create risk. The model also identifies the importance of evaluating the quality of bank controls as a means for limiting bank risk.
    Keywords: Bank supervision
    Date: 2013
  12. By: Leila Baghdadi (Tunis Business School); Rihab Bellakhal (Ecole Polytechnique of Tunis); Marc-Arthur Diaye (University of Evry Val d’Essonne)
    Abstract: Several papers report a positive effect of financial participation (profit-sharing, employee share ownership) on firms’ economic performance. This increase can be obtained in two main ways: by increasing the effort (extrinsic, intrinsic or commitment) of workers, directly or indirectly through worker selection; or by transferring more risk to the workers. The question is of course not neutral. Indeed if the risk transfer story is true then it means that the increase of economic performance is obtained at the expense of workers, who support more risks. The question is especially important in France where financial participation is associated with tax exemption for firms and where it is forbidden by law to substitute base wage and profit sharing. The purpose of our paper is to use three French data sets (an employer-employee data set- and two employer panel data sets), to answer the question of whether financial participation schemes are mainly designed as a risk transfer (from firms to workers) device.
    Keywords: Profit-sharing, ESOP, wage, risk sharing
    JEL: M52 J33
    Date: 2012–06
  13. By: DeVaro, Jed; Prasad, Suraj
    Abstract: A large literature, both theoretical and empirical, suggests that delegation of authority and incentives should have a positive relationship. Using data from a large cross section of British establishments, we show that the positive relationship between incentives and delegation that has been consistently documented in the empirical literature masks a stark difference between job types. We classify jobs into two categories: complex jobs include professional, technical and scientific occupations and simple jobs consist of all other occupations with a lower-level code in the Standard Occupational Classification (SOC) system. We find that for simple jobs, the relationship between delegation and incentives is positive as has been found in the previous literature, whereas for complex jobs it is negative. To explain this negative relationship for complex jobs, we develop a model where tasks have a risk-return tradeoff and where a single performance measure has to induce both task selection and effort. We find that if tasks vary sufficiently by risk and return and if effort is noisy to measure, then delegation and incentives have a negative relationship.
    Date: 2013–03
  14. By: Dessein, Wouter; Galeotti, Andrea; Santos, Tano
    Abstract: We examine the allocation of scarce attention in team production. Each team member is in charge of a specialized task, which must be adapted to a privately observed shock and coordinated with other tasks. Coordination requires that agents pay attention to each other, but attention is in limited supply. We show that when attention is scarce, organizational focus and leadership naturally arise as a response to organizational trade-offs between coordination and adaptation. At the optimum, all attention is evenly allocated to a select number of "leaders." The organization then excels in a small number of focal tasks at the expense of all others. Our results shed light on the importance of leadership, strategy and “core competences,” as well as new trends in organization design. We also derive implications for the optimal size or “scope” of organizations. Surprisingly, improvements in communication technology may result in smaller but more adaptive organizations.
    Keywords: Attention; Coordination; Core competencies; Leadership; Organization Size; Organizational Design; Organizational Strategy
    JEL: D2 D83 D85 L2
    Date: 2013–03
  15. By: Joanne Lindley (University of Surrey)
    Abstract: Despite the recent financial crisis the UK financial pay premium has continued to rise. To some extent this is a consequence of increased skill intensity in the finance sector, but this paper shows that finance workers have higher cognitive skills, on average, and this partly explains their higher wages. These are significant across all post-secondary education groups and not just those at the top. However, after controlling for unobserved heterogeneity we still find unexplainable rents to finance sector workers which are largely a consequence of bonuses. Though we also show that finance workers are more likely to be insecure about their job especially those that receive higher bonuses. In keeping with the existing literature on inequality we estimate demand and supply models to explain increasing inequality between finance workers vis-à-vis other workers. We find that finance workers are not perfect substitutes for non-finance workers in production, which is consistent with them having higher cognitive skills. Finally, we find relative demand shifts in favour of finance sector workers which are partially correlated with increased financial innovation and technical change, but most importantly we find that these demand shifts are slowing down.
    JEL: J20 J31 I24
    Date: 2013–03
  16. By: John P. Conley; Ali Sina Onder; Benno Torgler
    Abstract: Using life cycle publication data of 9,368 economics PhD graduates from 127 U.S. institutions, we investigate how unemployment in the U.S. economy prior to starting graduate studies and at the time of entry into the academic job market affect economics PhD graduates’ research productivity. We analyze the period between 1987 and 1996 and find that favorable conditions at the time of academic job search have a positive effect on research productivity (measured in numbers of publications) for both male and female graduates. On the other hand, unfavorable employment conditions at the time of entry into graduate school affects female research productivity negatively, but male productivity positively. These findings are consistent with the notion that men and women differ in their perception of risk in high skill occupations. In the specific context of research-active occupations that require high skill and costly investment in human capital, an ex post poor return on undergraduate educational investment may cause women to opt for less risky and secure occupations while men seem more likely to “double down” on their investment in human capital. Further investigation, however, shows that additional factors may also be at work.
    Keywords: Research Productivity, Human Capital, Graduate Education, Gender Differences
    JEL: J16 J24
    Date: 2013–03–14
  17. By: Elizabeth Ananat (Duke University); Shihe Fu (Xiamen University); Stephen L. Ross (University of Connecticut)
    Abstract: We demonstrate a striking but previously unnoticed relationship between city size and the black-white wage gap, with the gap increasing by 2.5% for every million-person increase in urban population. We then look within cities and document that wages of blacks rise less with agglomeration in the workplace location, measured as employment density per square kilometer, than do white wages. This pattern holds even though our method allows for non-parametric controls for the effects of age, education, and other demographics on wages, for unobserved worker skill as proxied by residential location, and for the return to agglomeration to vary across those demographics, industry, occupation and metropolitan areas. We find that an individual’s wage return to employment density rises with the share of workers in their work location who are of their own race. We observe similar patterns for human capital externalities as measured by share workers with a college education. We also find parallel results for firm productivity by employment density and share college-educated using firm racial composition in a sample of manufacturing firms. These findings are consistent with the possibility that blacks, and black majority firms, receive lower returns to agglomeration because such returns operate within race, and blacks have fewer same-race peers and fewer highly-educated same-race peers at work from whom to enjoy spillovers than do whites. Data on self-reported social networks in the General Social Survey provide further evidence consistent with this mechanism, showing that blacks feel less close to whites than do whites, even when they work exclusively with whites. We conclude that social distance between blacks and whites preventing shared benefits from agglomeration is a significant contributor to overall black-white wage disparities.
    Keywords: Black White Wage Gap, Agglomeration Economies, Human Capital Externalities, Information Networks, Total Factor Productivity
    JEL: J15 J24 J31 R23 R32
    Date: 2013–03
  18. By: Contini Dalit; Scagni Andrea (University of Turin)
    Abstract: Class differentials in educational attainment can be seen as a consequence of primary and secondary effects (Boudon 1974). The former,describe the influence of social origin on measured academic ability early in a child’s educational career; the latter operate through the choices that students and their families make within the educational system, given the student’s level of measured academic ability. In this work we evaluate the relative contributions of primary and secondary effects in creating educational inequalities in Italy at the transitions to upper secondary and tertiary education
    Date: 2012–09
  19. By: Joshua Graff Zivin; Matthew Neidell
    Abstract: In this review, we discuss three major contributions economists have made to our understanding of the relationship between the environment and individual well-being. First, in explicitly recognizing how optimizing behavior, particularly in the form of residential sorting, can lead to non-random assignment of pollution, economists have employed a wide range of quasi-experimental techniques to develop causal estimates of the effect of pollution. Second, economic research has placed a considerable focus on the role of avoidance behavior, which is an important component for understanding the difference between biological and behavioral effects of pollution and for proper welfare calculations. Lastly, economic research has expanded the focus of analysis beyond traditional health outcomes to include measures of human capital, including labor supply, productivity, and cognition. Our review of the quasi-experimental evidence on this topic suggests that pollution does indeed have a wide range of effects on individual well-being, even at levels well below current regulatory standards. Given the importance of health and human capital as an engine for economic growth, these findings underscore the role of environmental conditions as an important factor of production.
    JEL: H23 H41 I12 J24 Q5
    Date: 2013–04
  20. By: Hamilton, Kirk; Liu, Gang
    Abstract: Since income is the return on wealth, the total wealth of any given country should be on the order of 20 times its gross domestic product. Instead the average observed ratio from the balance sheet accounts of the System of National Accounts is a factor of 2.6 to 6.6, depending on whether natural resource stocks are included in the balance sheet. The clear implication is that the System of National Accounts wealth accounts are incomplete, with the most obvious omission being human capital. Estimating the value of human capital using the lifetime income approach for a sample of 13 (mostly high-income) countries yields a mean share of human capital in total wealth of 62 percent -- four times the value of produced capital and 15 times the value of natural capital. But for selected high-income countries in the sample there is still an average of 25 percent of total wealth that is unaccounted -- it is neither produced, nor natural, nor human capital. This residual intangible wealth is arguably the"stock equivalent"of total factor productivity -- the value of assets such as institutional quality and social capital that augment the capacity of produced, natural and human capital to support a stream of consumption into the future.
    Keywords: Economic Theory&Research,Banks&Banking Reform,Debt Markets,Investment and Investment Climate,Emerging Markets
    Date: 2013–03–01

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