Lowell J. Taylor

English

Research Papers in Economics

1 The model and discussion 
presented here are somewhat
different than those in the book
(and those presented at the
conference itself).  Readers 
are again encouraged to look
at the book as well. 
FEDERAL  RESERVE  BANK  OF  ST. LOUIS
51
MAY/JUNE  1999
Commentary
Lowell J. Taylor
I
n preparing my comment on Truman
Bewley’s work, I had the privilege of
reading a draft of Professor Bewley’s
forthcoming book, Why Wages Don’t Fall
During a Recession.  This book describes 
an extensive ﬁeld study, in which Professor
Bewley interviewed hundreds of business
managers and labor leaders, seeking to
understand the puzzling phenomenon of
wage rigidity.  The paper presented here is
an outgrowth of this project.  Before turn-
ing to the paper itself, I would like to make
a few comments about the research enter-
prise more generally.
I am quite enthusiastic about the manu-
script I read.  There are three reasons why
you should read this book.  First, you will
learn a lot of economics.  In the course of
discussing ideas raised in his interviews,
Professor Bewley cites and discusses a vast
literature (his book cites more than 1,000
papers!).  The book provides an engaging
way of becoming acquainted with the issues
currently under debate in the study of moti-
vation, compensation, labor markets, and
macroeconomics.  Second, the research
makes important headway in understanding
the nature of rigidities in labor markets.
Bewley makes a number of striking and 
controversial claims about labor markets, 
but always in a clear, well-reasoned, and con-
vincing manner.  Finally, the book will chal-
lenge you to think hard about how to “do
economics.”  Economic theorists generally
implicitly follow the path laid out by Milton
Friedman (1953):  We hope that even though
our assumptions are often self-consciously
unrealistic, useful predictions about behavior
can nonetheless be derived.  Bewley’s book
reminds us that when assumptions drift 
too far from reality, theory is a futile exercise
with no hope of shedding light on behavior.
Professor Bewley describes the central 
conclusion of his work as follows: 
From the interviews, I conclude that 
wage rigidity stems from a desire to 
encourage loyalty, a motive that super-
ﬁcially seems incompatible with lay-
offs.  My ﬁndings support none of the 
existing economic theories of wage 
rigidity, except those emphasizing the 
impact of pay cuts on morale.  Other 
theories fail in part because they are 
based on the unrealistic psychological 
assumptions that people’s abilities do 
not depend on their state of mind and 
that they are rational in the simplistic 
sense that they maximize a utility that 
depends only on their own consump-
tion and working conditions, not on 
the welfare of others.  
The paper presented at this conference
provides theoretical musings designed to
encourage readers to think about a world
in which morale and mood are part of
human behavior.
The idea here is to lay out a formal
representation in which workers’ decisions
depend not merely on balancing utility 
of earnings against disutility of effort, but
depend as well on morale—an internaliza-
tion of organizational objectives—and
mood—the worker’s psychological state 
of mind.  I do not know if the formaliza-
tions provided here or in the books are the
most fruitful ways of incorporating morale
and mood into models of worker-ﬁrm
interactions.1 Nonetheless, the exercise is
useful as a way of clarifying how explicit
consideration of mood and morale can
change the usual predictions of agency
theory.  Indeed, it is clear that people do
pay attention to the well-being of others,
and that the way in which they do this
depends critically on their own “mood.”
Bewley’s work persuades me that this gen-
eral idea can be important in understand-
ing many features of workplace behavior.  
Lowell J. Taylor is a professor of economics at the H. John Heinz III School of Public Policy and Management at Carnegie Mellon University.FEDERAL RESERVE BANK OF ST. LOUIS
52
MAY/JUNE 1999
A simple story of a “rude driver”
might provide a useful way of thinking
about these kinds of motivation.  Suppose
you are traveling by automobile to an
important engagement for which you 
deﬁnitely do not want to be late.  Con-
struction has closed the left lane of the
highway, and you are stuck waiting, not 
too patiently, in the right lane as trafﬁc
inches its way toward the construction
site.  You notice in your rearview mirror 
a lone car whizzing past the “merge 
right” signs, bypassing drivers—yourself
included—who have dutifully pulled into
the right lane.  The driver proceeds to the
very last spot at which the car can physi-
cally remain in the left lane and signals
right, hoping to pull in front of you!  What
do you do?  Do you let him in or not?
The self-interest model normally
employed by economists provides an 
easy answer.  Letting the driver pull into
your lane imposes a cost—it increases the
probability that you will be late for your
engagement—and gives you no beneﬁt, so
you do not let him in.  Economists under-
stand, though, that this simple way of
viewing the problem is not exactly right.
People are routinely altruistic; they pay
attention to others’ well-being.  There are
many examples in which ideas are incor-
porated into formal economic models,
including, for instance, Gary Becker’s
(1991) work on the family and Matthew
Rabin’s (1993) theory of fairness.  In the
current context, you would surely be 
willing to let the driver pull in front of 
you if you noticed a pregnant woman in
the car who appeared to be in labor.
The idea here is simple: People 
care about others and are often willing 
to sacriﬁce their own material well-being
to beneﬁt others.  Moreover, in models 
like Rabin’s and in empirical work like
Andreoni and Miller (1996), people incor-
porate others’ welfare into their own deci-
sion-making in generally predictable ways.
For example, Andreoni and Miller conduct
experiments which demonstrate that indi-
viduals’ willingness to sacriﬁce money
varies with the extent to which other 
individuals beneﬁt from the sacriﬁce.
Returning to the scenario of the rude 
driver, though, it is clear that something
besides even the altruism of Rabin is at
work in most people’s decision-making.
Your decision of whether to let the driver
pull in front may well depend not only on
your assessment of the potential beneﬁts
to the driver (e.g., does he have a pregnant
passenger?), but also on your gut-level
belief about the driver’s motives.  If you
believe the driver is indeed being rude or
obnoxious, you may be anxious not to let
him; you might even be willing to suffer
some cost to avoid letting him in.  On the
other hand, if there is some indication that
the driver was merely confused (perhaps
he has an out-of-state license plate and a
befuddled, contrite look on his face), you
will be more inclined to let him in.  The
point is that your utility function evidently
depends, at a minimum, on three factors:
first, your own narrow, self-interested goal—
to move through trafﬁc as quickly as possi-
ble; second, your internalization of the
other driver’s goals; and, third, your own
mental state, which in this case follows
from your assessment of the other driver’s
motives.  This last part of the decision-
making process may be transparent at the
time or may work at a largely subcon-
scious level.  It is self-evidently important
in the rude driver scenario, and it may be
important in other contexts as well.  
By section 4 of his paper, Bewley works
up to a representation of worker prefer-
ences that perhaps parallels the observa-
tions we glean from the rude driver scenario.
Bewley’s characterization of utility, both
“conscious” and “unconscious,” depends, as
usual, on compensation and effort.  It incor-
porates also an internalization of the goal of
the ﬁrm’s owners.  This altruistic component
is not generally included in theorists’ repre-
sentations of preferences, but as just noted,
it is sometimes incorporated; it appears, for
instance, as a central component in George
Akerlof’s (1982) gift exchange model of
worker-ﬁrm interaction.  Bewley pushes 
further, though, by positing a model that
includes “morale,” which he suggests has
two key aspects:  an internalization of the
ﬁrm’s goal (ﬁrm proﬁt) and his mental stateFEDERAL  RESERVE  BANK  OF  ST. LOUIS
53
MAY/JUNE  1999
or mood.  As in the rude driver story, an
individual’s behavior is affected by his own
personal objectives and by an inclination
to at least consider the well-being of others
(in this case the employer), but all of this
is tempered by a more elusive construct—
mood or mental state.
Building from this basic representation
of worker preferences, Bewley derives a
number of implications that seem in accord
with the observations he gathered in his
ﬁeld research.  In so doing, he clearly
demonstrates the viability and value of con-
structing a model that pays serious atten-
tion to motivations that (realistically) move
beyond the usual assumption in principal–
agent models.  Bewley’s work covers lots 
of ground, making suggestions about how
to incorporate mood and morale, and also
exploring cooperation, information sharing,
and the relative merits of managers’ use of
morale and coercion.
This is a valuable contribution to
behavioral economics as applied to the
workplace; it provides seed ideas that
other economists will ﬁnd useful in doing
their own theoretical work.  Economists
may ﬁnd alternative ways of constructing
realistic models of work motivation, mod-
els that include a serious effort to incorpo-
rate features like morale and mood.  In 
this enterprise, they will do well to follow
Professor Bewley’s exemplary effort to see
that their formal representations are ﬁrmly
rooted in careful systematic observation of
the real world.
REFERENCES
Akerlof, George A.  “Labor Contracts as Partial Gift Exchange,” 
Quarterly Journal of Economics 96 (November 1982), pp. 543-69.
Andreoni, James, and John H. Miller.  “Giving According to GARP,” 
Working Paper, Carnegie Mellon University, (1996).
Becker, Gary.  A Treatise on the Family, Harvard University Press,
(1991).
Friedman, Milton.  “The Methodology of Positive Economics,” Part 1 in
Essays in Positive Economics, University of Chicago Press, (1953).
Rabin , Matthew.  “Incorporating Fairness into Game Theory and
Economics,” American Economic Review 83 (December 1993),  
pp. 1281-302.MAY/JUNE 1999
FEDERAL RESERVE BANK OF ST. LOUIS
54

Work motivation, commentary

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics