Equal and unequal profit sharing in highly interdependent work groups: a laboratory experiment

We study behavior in a simplified representation of an organization with high task interdependence. The production process involves three stages such that output of earlier stages is the necessary input for subsequent stages. Work at earlier stages is easier than at later stages and the product is only final if it goes successfully through the highest stage. We compare the effects on the performance of the organization of a payment scheme in which profits are equally shared by all those involved in the production process with one where the participation in profits is strongly increasing in the production stage. The comparison is made for two ways of assigning individuals to the production stage: randomly or by merit. We find that initially there is no difference in the organization’s profit between the two sharing schemes, but over time profits increase more with the equal sharing scheme. Changes in profits over time can be explained by changes in production performance over time. After participants have gained experience in the tasks, the equal profit sharing scheme has positive performance effects both at the lowest and the highest production stages. There are only minor differences in the results depending on whether the payment scheme is exogenously imposed or chosen by the person at the highest stage

Distributional concerns in managers’ compensation schemes for heterogeneous workers: experimental evidence

We present results from three-player experiments aimed at studying distributional concerns in how ownermanagers compensate themselves and workers of different productivities and effort costs, as well as their relations to various equity principles. We are also interested in how owner-managers decisions’ are affected by pay secrecy. We use a game in which workers first exert effort and owner-managers then decide on bonuses for themselves and workers. Our design includes four treatments: 1) different productivities of workers with complete information; 2) different productivities of workers with pay secrecy among workers; 3) different effort cost of workers with complete information; and 4) different effort cost of workers with pay secrecy among workers. The equity principles we focus on are ‘production-equity’, higher production leads to higher wage, and ‘effort-cost equity’, higher effort-cost leads to higher wage. Our results show that, on average, managers do not pay relative wages in accordance to relative production levels, but also take effort-cost into account. Pay secrecy affects compensation differences among workers in a limited way. Across all treatments about 50% of all manager choices are compatible both with ‘production equity’ and with ‘effort- cost equity’, about 20% only with production equity and about 15% only with effort-cost equity

A ‘threat’ is a ‘Threat’: Incentive effects of firing threats with varying degrees of performance information

We study the incentive effect of firing threats when bosses have limited information about workers. We show that a minimal amount of individual information about workers’ effort such as the time spent at their work station is sufficient to ensure strong incentive effects. This supports the use of firing threats based on rudimentary yet uncontroversial measures of work performance such as absenteeism, in organizational settings in which only limited information about workers is available. Our results help understand the limited link between pay and performance observed in compensation contracts calling for an extension of the principal-agent model to take into account how workers (mis-)perceive the intensity of incentives

Forward induction and entry deterrence: an experiment

The Dixit (Econ J 90:95–106, 1980) hypothesis that incumbents use investment in capacity to deter potential entrants has found little empirical support. Bagwell and Ramey (J Econ 27:660–680, 1996) propose a model where, in the unique game-theoretic prediction based on forward induction or iterated elimination of weakly-dominated strategies, the incumbent does not have the strategic advantage. We conduct an experiment with games inspired by these models. In the Dixit-style game, the incumbent monopolizes the market most of the time even without the investment in capacity. In our Bagwell-and-Ramey-style game, the incumbent also tends to keep the market, in contrast to the predictions of an entrant advantage. Nevertheless, we fin strong evidence that forward induction affects the behavior of most participants. The results of our games suggest that players perceive that the firs mover has an advantage without having to pre-commit capacity. In our Bagwell–Ramey game, evolution and learning do not drive out this perception. We back these claims with data analysis and a theoretical framework for dynamics.Publicad

Sequential two-player games with ambiguity

Author's pre-printIf players' beliefs are strictly nonadditive, the Dempster–Shafer updating rule can be used to define beliefs off the equilibrium path. We define an equilibrium concept in sequential two-person games where players update their beliefs with the Dempster–Shafer updating rule. We show that in the limit as uncertainty tends to zero, our equilibrium approximates Bayesian Nash equilibrium. We argue that our equilibrium can be used to define a refinement of Bayesian Nash equilibrium by imposing context-dependent constraints on beliefs under uncertainty.ESRC senior research fellowship scheme, H5242750259

Accidental Outcomes Guide Punishment in a “Trembling Hand” Game

How do people respond to others' accidental behaviors? Reward and punishment for an accident might depend on the actor's intentions, or instead on the unintended outcomes she brings about. Yet, existing paradigms in experimental economics do not include the possibility of accidental monetary allocations. We explore the balance of outcomes and intentions in a two-player economic game where monetary allocations are made with a “trembling hand”: that is, intentions and outcomes are sometimes mismatched. Player 1 allocates $10 between herself and Player 2 by rolling one of three dice. One die has a high probability of a selfish outcome, another has a high probability of a fair outcome, and the third has a high probability of a generous outcome. Based on Player 1's choice of die, Player 2 can infer her intentions. However, any of the three die can yield any of the three possible outcomes. Player 2 is given the opportunity to respond to Player 1's allocation by adding to or subtracting from Player 1's payoff. We find that Player 2's responses are influenced substantially by the accidental outcome of Player 1's roll of the die. Comparison to control conditions suggests that in contexts where the allocation is at least partially under the control of Player 1, Player 2 will punish Player 1 accountable for unintentional negative outcomes. In addition, Player 2's responses are influenced by Player 1's intention. However, Player 2 tends to modulate his responses substantially more for selfish intentions than for generous intentions. This novel economic game provides new insight into the psychological mechanisms underlying social preferences for fairness and retribution