nep-hrm New Economics Papers
on Human Capital and Human Resource Management
Issue of 2013‒10‒02
eighteen papers chosen by
Tommaso Reggiani
University of Cologne

  1. Incentivizing Calculated Risk-Taking: Evidence from an Experiment with Commercial Bank Loan Officers By Shawn Cole; Martin Kanz; Leora Klapper
  2. Employee Trust and Workplace Performance By Sarah Brown; Jolian McHardy; Karl Taylor
  3. Win Shift Lose Stay - An Experimental Test of Non-Compete Clauses By Guido Bünstorf; Christoph Engel; Sven Fischer; Werner Güth
  4. Empirical Evidence on the Dynamics of Incentive Plans By Kato, Takao; Kauhanen, Antti; Salmi, Julia
  5. Pay for Performance and Compensation Inequality: Evidence from the ECEC By Maury Gittleman,; Brooks Pierce,
  6. Why High Human Capital Makes Good Revolutionaries: The Role of the Middle Classes in Democratisation By Frederik Toscani
  7. It’s Not the Size of the Gift; It’s How You Present It: New Evidence on Gift Exchange from a Field Experiment By Duncan Gilchrist; Michael Luca; Deepak Malhotra
  8. Performance Measurement in Healthcare Incentive Plans By Kauhanen, Antti; Salmi, Julia; Torkki, Paulus
  9. Female-Led Firms: Performance and Risk Attitudes By Parrotta, Pierpaolo; Smith, Nina
  10. Precocious Albion: a New Interpretation of the British Industrial Revolution By Morgan Kelly; Joel Mokyr; Cormac Ó Gráda
  11. Home or away? Gender differences in the effects of an expansion of tertiary education supply By Lucia Rizzica
  12. Incentives and Information as Driving Forces of Default Effects By Altmann, Steffen; Falk, Armin; Grunewald, Andreas
  13. The Performance Effects of Individual and Group Incentives: A Case Study By Kato, Takao; Kauhanen, Antti; Kujansuu, Essi
  14. Financing Experimentation By Macchiavello, Rocco
  15. Child Labour and Inequality By Tamara Fioroni; Simone D\'Alessandro
  16. Subsidiary managers' knowledge mobilizations: Unpacking emergent knowledge flows By Esther Tippmann; Pamela Sharkey Scott; Vincent Mangematin
  17. Social Norms on Working Hours, Work-Life Balance, and Fertility Choice By Kohei Daido; Ken Tabata
  18. Entrepreneurial Orientation and Network Ties: Innovative Performance of SMEs in an Emerging-Economy Manufacturing Cluster By Theresia Gunawan; Jojo Jacob; Geert Duysters

  1. By: Shawn Cole; Martin Kanz; Leora Klapper
    Abstract: We use an experiment with commercial bank loan officers to test how performance based compensation affects risk-assessment and lending. High-powered incentives lead to greater screening effort and more profitable lending decisions. This effect, however, is muted by deferred compensation and limited liability, two standard features of loan officer incentive contracts. We find that career concerns and personality traits affect screening behavior, but show that the response to monetary incentives does not vary with traits such as risk-aversion, optimism or overconfidence. Finally, we present evidence that incentive contracts distort the assessment of credit risk, even among trained professionals with many years of experience. Loans evaluated under permissive incentives are rated significantly less risky than the same loans evaluated under pay-for-performance.
    JEL: D03 G21 J33
    Date: 2013–09
  2. By: Sarah Brown (Department of Economics, The University of Sheffield); Jolian McHardy (Department of Economics, The University of Sheffield); Karl Taylor (Department of Economics, The University of Sheffield)
    Abstract: We explore the relationship between employee trust and workplace performance. We present a theoretical framework which serves to establish a link between employee trust and firm performance as well as to identify possible mechanisms through which the relationship may operate. We then analyse matched workplace and employee data in order to ascertain whether the average level of employee trust within the workplace influences workplace performance. We exploit the 2004 and 2011 Work Place and Employee Relations Surveys (WERS) to analyse the role of employee trust in influencing workplace performance in both pre and post recessionary periods. Our empirical findings support a positive relationship between three measures of workplace performance (financial performance, labour productivity and product or service quality) and employee trust at both points in time. We then exploit employee level data from the WERS to ascertain the determinants of employee trust as well as how trust is influenced by measures taken by employers to deal with the recent recession. Our findings suggest that restricting paid overtime and access to training potentially erode employee trust. In addition, we find that job or work reorganisation experienced at either the employee or organisation level are associated with lower employee trust.
    Keywords: employee trust; financial performance; labour productivity; product quality.
    JEL: J20 J50
    Date: 2013
  3. By: Guido Bünstorf (University of Kassel); Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn); Sven Fischer (Max Planck Institute for Research on Collective Goods, Bonn); Werner Güth (Max Planck Institute of Economics, Strategic Interaction Group, Jena)
    Abstract: We experimentally test the effect of enforceable non-compete clauses on working efforts. The employee can invest into the probability of making a profitable innovation. After a successful innovation (Win) the employee may want to leave the firm (Shift) whereas after an innovation failure (Lose) he may remain (Stay) . In the treatments with non-compete clause, but not in the baseline, the employer can prevent successful innovators from leaving the firm. With standard preferences, effort should be lower if the worker cannot leave the firm, except if compulsory compensation for having to stay is very high. By contrast we find no reduction in effort even if compensation is low. Employers anticipate the incentive problem and pay a higher wage which employees reciprocate by higher effort.
    Keywords: labor relations, non compete clause, non compete covenant, reciprocity, fairness
    JEL: L51 D21 J33 J38
    Date: 2013–09–20
  4. By: Kato, Takao; Kauhanen, Antti; Salmi, Julia
    Abstract: Using three different waves of a survey on compensation practices from 2005, 2007, and 2010, we study the dynamics of incentive plans. We describe that firms frequently discontinue incentive plans and often change performance measures and organizational levels of performance measurement. The results show that incentive plans are dynamic in nature, but that the dynamics are difficult to explain. The power of the leading theoretical explanations for these changes, i.e., turbulence in the operating environment and learning about performance measures, is not strong.
    Date: 2013–09–24
  5. By: Maury Gittleman, (U.S. Bureau of Labor Statistics); Brooks Pierce, (U.S. Bureau of Labor Statistics)
    Abstract: It is well known that earnings inequality in the United States has been on the rise over the last three decades. Compensation inequality, while much less studied, has been moving upward as well. Motivated in part by an attempt to explain a widening of inequality in the upper part of the distribution, Lemieux, MacLeod and Parent (2009) investigated the relationship between the use of performance pay schemes and wage inequality using the Panel Study of Income Dynamics. Viewing such a contractual arrangement as a channel through which rising demand for skill is translated into increased inequality, they estimated that pay for performance accounts for about one-fifth of the growth in the variance of male wages between the late 1970s and the early 1990s, and for almost all of the increase in wage inequality in the top quintile during the same period. In this paper, we also assess the relationship between performance pay and inequality, making a number of different contributions to the literature. First, the dataset we use, the Bureau of Labor Statistics’ Employee Costs for Employee Compensation (ECEC), allows us to look at a much broader concept of pay than that used by LMP, which consists largely of hourly earnings inclusive of performance pay (bonuses, piece-rates and commissions). It is important to relate methods of pay to total compensation because any effects noted on wages may be offset or amplified when one moves to broader definitions of compensation. Second, there are numerous types of bonuses, not all of which fall under the rubric of pay for performance. While LMP are forced by the limitations in the PSID to treat all types of bonuses as being the same, in some of our analyses, we are able to distinguish among them. Third, while the LMP analysis ends in the mid-1990s, our investigation is of a more recent time period, 1994 to 2010. Finally, allowing greater precision in our estimates, our dataset is significantly larger than the PSID. Our results suggest that while the presence of performance pay jobs is associated with higher levels of inequality, such jobs have made only a modest contribution toward an increase in inequality in the period under study.
    Keywords: pay for performance, compensation inequality
    JEL: J33 M52
    Date: 2013–09
  6. By: Frederik Toscani
    Abstract: This paper studies how human capital affects agents' tendency to participate in revolutions and consequently political outcomes. We show that since human capital is not expropriatable in the way land or other assets are, revolutions are more attractive if human capital is an important source of income. Specifically, we present a model of involuntary franchise extensions in which we establish a formal link between the increasing importance of human capital as a source of income for mainly the middle classes in 19th century Europe and franchise extensions. Intuitively, agents become less change averse when their income cannot be expropriated and thus larger and larger concessions from the elite are necessary to avoid any upheaval. We show that the higher human capital is in a country, the more the elite use 'populist' policies aimed at garnering the support of the poor and the larger are the franchise extensions which the elite use to counter a revolutionary threat. While we derive the mechanism linki ng human capital and democratisation by looking at 19th century Europe it might play an important role more generally, notably in the wave of democratisations in Latin America in the 1980s and in the current Arab uprisings.
    Keywords: Democratisation, Involuntary Franchise Extensions, Human Capital, Middle Class
    JEL: D72 D74 J24 P16 H1
    Date: 2013–09–24
  7. By: Duncan Gilchrist (Harvard University); Michael Luca (Harvard Business School, Negotiation, Organizations & Markets Unit); Deepak Malhotra (Harvard Business School, Negotiation, Organizations & Markets Unit)
    Abstract: Behavioral economists argue that above-market wages elicit reciprocity, causing employees to work harder - even in the absence of repeated interactions or strategic career concerns. In a field experiment with 266 employees, we show that paying above-market wages, per se, does not have an effect on effort. However, structuring a portion of the wage as a clear and unexpected gift (by hiring at a given wage, and then offering a raise with no further conditions after the employee has accepted the contract) does lead to persistently higher effort. Consistent with the idea that the recipient's interpretation of the wage as a gift is an important factor, we find that effects are strongest for employees with the most experience and those who have worked most recently - precisely the individuals who would recognize that this is a gift.
    Date: 2013–09
  8. By: Kauhanen, Antti; Salmi, Julia; Torkki, Paulus
    Abstract: By using quantitative survey data and conducting a case study, we examine performance measurement of incentive plans in Finnish private sector health care organizations. We find that the performance measures used in the incentive plans are in line with recent economic theories of performance measurement. The findings from the case study emphasize the importance of choosing appropriate performance measures and designing the pay package as a whole. Inadequate performance measurement leads to incentive plans that do not help organizations reach their goals.
    Date: 2013–09–24
  9. By: Parrotta, Pierpaolo (Aarhus School of Business); Smith, Nina (Aarhus University)
    Abstract: This paper investigates the relationship between gender of the CEO and composition of the board of directors (female chairman and share of women in the boardroom) and firm's risk attitudes measured as variability in four firm outcome variables (investments, profits, return to equity, and sales). Using a merged employer-employee panel sample of Danish companies with more than 50 employees, we find extensive evidence of a negative association between female CEO and firm's risk attitudes. This finding might be consistent with the theoretical assumption according to which women typically present a substantially higher risk aversion profile and put more effort in monitoring firm activities than men in the financial matter domains. A number of robustness checks corroborate and better explain our main findings.
    Keywords: firm performance, risk aversion, female CEO
    JEL: G34 J16 L25
    Date: 2013–09
  10. By: Morgan Kelly (University College Dublin); Joel Mokyr (Northwestern University); Cormac Ó Gráda (University College Dublin)
    Abstract: Why was Britain the cradle of the Industrial Revolution? Answers vary: some focus on resource endowments, some on institutions, some on the role of empire. In this paper, we argue for the role of labour force quality or human capital. Instead of dwelling on mediocre schooling and literacy rates, we highlight instead the physical condition of the average British worker and his higher endowment of skills. These advantages meant that British workers were more productive and better paid than their Continental counterparts and better equipped to capitalize on the technological opportunities and challenges confronting them (This paper should be read in conjunction with WP13/12: Morgan Kelly, Joel Mokyr and Cormac Ó Gráda: 'Appendix to “Precocious Albion: a New Interpretation of the British Industrial Revolution”' September 2013).
    Keywords: Industrial Revolution, Human Capital, Economic Growth
    Date: 2013–09–24
  11. By: Lucia Rizzica (Bank of Italy)
    Abstract: The aim of this paper is to estimate the effects of the expansion of tertiary education supply on the educational choices of young Italian high school graduates. A quasi-experimental setting given by the reform of the tertiary education system implemented in 2001 is exploited. The reform was embraced at different points in time and to different degrees: it created significant changes in local educational supply in certain provinces while being only marginally relevant in others. This geographical variation is exploited through a diff-in-diff strategy to estimate the impact of the increase in tertiary education supply on enrolment and the mobility decisions of high school graduates. Major gender differences emerge: the increase of local tertiary education supply generated a significant increase in female enrolment rates leaving unchanged those of males; men, on the other hand, switched from studying outside their province of residence to studying at the local university. These results would suggest the existence of a relationship of substitutability between studying away from home and studying at the local university for boys, but not for girls.
    Keywords: human capital, tertiary education, gender, evaluation of education reform
    JEL: H52 I23 I28 J24
    Date: 2013–06
  12. By: Altmann, Steffen (IZA); Falk, Armin (University of Bonn); Grunewald, Andreas (University of Bonn)
    Abstract: The behavioral relevance of non-binding default options is well established. While most research has focused on decision makers' responses to a given default, we argue that this individual decision making perspective is incomplete. Instead, a comprehensive understanding of the foundation of default effects requires taking account of the strategic interaction between default setters and decision makers. We provide a theoretical framework to analyze which default options arise in such interactions, and which defaults are more likely to affect behavior. The key drivers are the relative level of information of default setters and decision makers, and their alignment of interests. We show that default effects are more pronounced if interests of the default setter and decision makers are more closely aligned. Moreover, decision makers are more likely to follow default options the less they are privately informed about the relevant decision environment. In the second part of the paper we experimentally test the main predictions of the model. We report evidence that both the alignment of interests as well as the relative level of information are key determinants of default effects. An important policy relevant conclusion is that potential distortions arising from default options are unlikely if decision makers are either well-informed or reflect on the interests of default setters.
    Keywords: default options, libertarian paternalism, behavioral economics, incentives, laboratory experiment
    JEL: D03 D18 D83 C92
    Date: 2013–09
  13. By: Kato, Takao; Kauhanen, Antti; Kujansuu, Essi
    Abstract: We study a warehouse that changes its incentive plan from a group plan to an individual plan. We focus on the impact that the change had on productivity, allocation of time to different tasks, and helping across departments. Utilizing time series methods we find that average productivity increased about 15 % but that individuals reacted heterogeneously to the change. The change also affected the organization of helping across departments and the allocation of time to various tasks. In addition to the econometrics analysis we provide a description of the process of changing the incentive plan and discuss the cost effectiveness of the change of the plan.
    Date: 2013–09–24
  14. By: Macchiavello, Rocco (Department of Economics, University of Warwick)
    Abstract: Entrepreneurs must experiment to learn how good they are at a new activity. What happens when the experimentation is financed by a lender? Under common scenarios, i.e., when there is the opportunity to learn by "starting small" or when "no-compete" clauses cannot be enforced ex-post, we show that financing experi- mentation can become harder precisely when it is more profitable, i.e., for lower values of the known-arm and for more optimistic priors. Endogenous collateral requirements (like those frequently observed in micro-credit schemes) are shown to be part of the optimal contract. JEL classification: Experimentation ; Moral Hazard ; Adverse Selection ; Starting Small ; Competition JEL codes: D81 ; D86 ; G30
    Date: 2013
  15. By: Tamara Fioroni (Department of Economics (University of Verona)); Simone D\'Alessandro (University of Pisa)
    Abstract: This paper focuses on the evolution of child labour, fertility and human capital in an economy characterized by two types of workers, low- and high-skilled. This heterogeneity allows an endogenous analysis of inequality generated by child labour. More specically, according to empirical evidence, we offer an explanation for the emergence of a vicious cycle between child labour and inequality. The basic intuition behind this result arises from the interdependence between child labour and fertility decisions. Furthermore, we investigate how child labour regulation policies can influence the welfare of the two groups in the short run, and the income distribution in the long run. We find that conflicts of interest may arise between the two groups.
    Keywords: Child Labour, Fertility, Human capital, Inequality
    JEL: J13 J24 J82 K31
    Date: 2013–09
  16. By: Esther Tippmann (University College Dublin - University College Dublin); Pamela Sharkey Scott (Dublin Institute of Technology - Dublin Institute of Technology); Vincent Mangematin (MTS - Management Technologique et Strategique - Grenoble École de Management (GEM))
    Abstract: Knowledge flows are a key source of advantage for multinational corporations (MNCs). As research on subsidiary knowledge flows to date has mostly focused on organization-level investigations, often using quantitative methodologies, the nuances of knowledge flows practices and their micro-foundations require further theoretical development. Using detailed qualitative data on 40 cases of subsidiary managers' knowledge mobilizations, this paper unravels some of the micro-level practices of knowledge mobilizations in MNCs. We find that subsidiary manager's knowledge mobilization practices initiate a complex pattern of subsidiary knowledge inflows, pinpointing the significance of lateral and bottom up exchanges (locally as well as internationally) and the emergent nature of utilizing practices, specialist skills and expertise, as well as experience and advice to develop solutions. We use these insights to distinguish between two types of subsidiary knowledge flows: deliberate and emergent knowledge flows and highlight how their differences have profound implications for the investigation of subsidiary and MNC knowledge flows and their micro-foundations.
    Keywords: knowledge flow.; knowledge transfers; MNC/MNE; knowledge seeking behavior. middle managers; subsidiary
    Date: 2012
  17. By: Kohei Daido (School of Economics, Kwansei Gakuin University); Ken Tabata (School of Economics, Kwansei Gakuin University)
    Abstract: This paper studies the role played by the social norms of working hours in a household labor- leisure and fertility decision model. We suppose that social norms enforce workers not to deviate from the ideal level of working hours, which depends on past and current observations of working hours in workplaces. We show that the social norms lead to multiple equilibria: one with long working hours and a low fertility rate and another with short working hours and a high fertility rate. Our results may help to explain the long working hours and low fertility rate that are observed in Japan.
    Keywords: Fertility, Work-life balance, Social norms, Peer effects
    JEL: O40 J11 J22
    Date: 2013–09
  18. By: Theresia Gunawan (Maastricht School of Management and Technical University of Eindhoven, the Netherlands); Jojo Jacob (United Nation University- Maastricht Economic and Social Research Institute on Innovation and Technology (UNU MERIT), the Netherlands); Geert Duysters (Tilburg University, the Netherlands)
    Abstract: This study investigates the role of intra-cluster ties, extra-cluster ties, and entrepreneurial orientation in shaping firms’ innovative performance. We conduct our analysis on a primary data set of 120 SMEs in the Cibaduyut footwear-manufacturing cluster, Indonesia. We find that extra-cluster ties mediate the relationship between proactiveness and innovative performance. A combination of high extra-cluster ties and risk taking exert a positive impact on innovative performance. Surprisingly, we find that risk taking negatively moderates the influence of intra-cluster ties on innovative performance. Overall, the findings of this study point to the synergistic effects of entrepreneurial orientation and extra-cluster ties on innovative performance.
    Date: 2013–08

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