Externalities in Recruiting

External recruiting at least weakly improves the quality of the pool of applicants, but the incentive implications are less clear. Using a contest model, this paper investigates the pure incentive effects of external recruiting. Our results show that if workers are heterogeneous, the opening of a firm’s career system may lead to a homogenization of the pool of contestants and, thus, encourage the firm’s high ability workers to exert more effort. If this positive effect outweighs the discouragement of low ability workers, the firm will benefit from external recruiting. If, however, the discouragement effect dominates the homogenization effect, the firm should disregard external recruiting. In addition, product market competition makes opening of the career system less attractive for a firm since it increases the incentives of its competitors’ workers and hence strengthens the competitors

The Firm as the Locus of Social Comparisons

We suggest a parsimonious dynamic agency model in which workers have status concerns. A firm is a promotion hierarchy in which a worker's status depends on past performance. We investigate the optimality of two types of promotion hierarchies: (i) standard promotion practices, where agents have a job guarantee, and (ii) “up-or-out”, in which agents are fired when unsuccessful. We show that up-or-out is optimal if success is difficult to achieve. When success is less hard to achieve, standard promotion practices are optimal provided the payoffs associated with success are moderate. Otherwise, up-or-out is, again, optimal

Empathy: A clue for prosocialty and driver of indirect reciprocity.

Indirect reciprocity has been proposed to explain prosocial behavior among strangers, whereby the prosocial act is returned by a third party. However, what happens if the prosocial act cannot be observed by the third party? Here, we examine whether empathy serves as a clue for prosociality and whether people are more generous toward more empathetic people. In a laboratory study, we measured prosocial behavior as the amount sent in the dictator game and empathy based on the Interpersonal Reactivity Index (IRI). By using an incentivized task, we find that people believe that more empathetic participants send more money in the dictator game. Thus, people see empathy as a clue for prosocial behavior. Furthermore, in a second dictator game, participants indirectly reciprocate by sending more money to more empathetic recipients. Therefore, we suggest that empathy can replace a reputation derived from observable prosocial behavior in triggering indirect reciprocity

Social preferences and sales performance

We use an incentivized experimental game to uncover heterogeneity in social preferences among salespeople in a large Austrian retail chain. Our results show that the majority of agents take the welfare of others into account but a significant fraction reveal selfish behavior. Matching individual behavior in the game with firm data on sales performance shows that agents with social preferences achieve a significantly higher revenue per customer. However, at the same time, they achieve fewer sales per day. Both effects offset each other, so that the overall association with total sales revenue becomes insignificant. Our findings highlight the nuanced role of selfish versus social preferences in sales contexts with important implications for economic research

Penalty contracts: is it all about paying the cash upfront?

We experimentally investigate the relevance of a cash upfront payment for the effort-enhancing effect of penalty contracts. We find that penalty contracts where participants receive the upfront payment physically before working on a real effort task induce more effort than penalty contracts where participants are only informed about the upfront payment. When comparing penalty contracts with economically-equivalent bonus contracts, we find that penalty contracts lead to higher effort provision than bonus contracts, but only if participants physically receive the upfront cash payment in advance. We suggest that the higher salience of the cash upfront payment might be a core driver of the detected framing effect. Our findings emphasize the importance of experimental design choices when studying framed incentive contracts