1. Labor economics Why is labor behaviorally interesting?
Important in scale
What people sell is themselves (identity, appreciation)
Natural social comparison with others
Quality assurance problem + room for rationalization
Firms’ problem is endogenous sorting & incentive
Behavioral effects in labor markets:
“Gift exchange” and supra-marginal wages
Crowding out
Critique of the single-activity agency model
Labor supply: Cabs

2. 1. Too-high wages and unemployment Efficiency wages vs gift exchange
Price P
supply
Wage w
demand
Quantity Q
unemployment at w

3. Why are wages too high? Efficiency wages (Stiglitz et al)
Pay “too much” so workers have something to lose if they shirk
Why don’t workers bid for jobs?
Role for nepotism, social networks, “hiring bonusses” ($5k consulting firm “bounties”)
“Gift exchange” (Akerlof-Yellen)
Pay “too much” so workers reciprocate with high (uncontractible) effort
Consistent with resistance to wage cuts (Bewley)
Experimental evidence (Fehr et al, PJ Healy,…)

4. Moral hazard in contracting: Theory and experimental evidence
Fehr setup:
Firms offer w
Firms earn 10e-w
Workers choose e
Workers earn w-c(e)
No reputations (cf. PJ Healy)

5. Competition does not drive wages down…firms choose high wage offer workers & expect reciprocity

6. 2. Crowding out
Do extrinsic ($) incentives crowd out intrinsic motivation?
Do puzzles for $ or no-$. After $ removed, no-$ group does more puzzles (Deci et al)
Female tennis players: Play for fun as kids…
…later on tour, quit after getting appearance fee
Q: Is it a “strike” or permanent decrease in incentive?

7. Benabou-Tirole REStud 03
Workers infer task difficulty or skill from wage offer (“overjustification”, “self-perception”, “looking glass self”)
Worker exerts effort 0,1, cost is c in [c*,c*]
Worker gets signal σ correlated with c
Success pays V to agent, W to firm
Θ is probability of success given effort
Firm offers bonus b
Worker exerts effort c(σ,b)<Θ(V+b) works if σ>σ*(b)
Prop 1: In equilibrium
Bonus is short-term reinforcer: b1<b2  σ*(b1)>σ*(b2)
Rewards are bad news: b1<b2E[c|σ1,b1] < E[c|σ2,b2]
Empirical leverage: Negative effect occurs only if firm knows more about task difficulty or worker skill than the worker knows

8. 3.Critiques of standard agency model
Standard model (one activity)
Firms pay wage package w=f+b(e+θ)
Workers choose hidden effort e
b is “piece rate”, θ is “luck”
Risk-neutral firms earn Π(e)-w
Risk-averse workers earn w-c(e)-var(w)
Tradeoff:
“High powered incentive” b increases motivation…
…but creates bad variance in wages

9. Behavioral critiques Workers don’t know c(e) (prefs constructed)
U(W-r) depends on reference point
Previous wages, wages of others
Workers care about procedures or income source
Psychic income: meaning and appreciation
Crowding out of intrinsic motivatoin
Biases in separating e and θ
Hindsight bias (agents should have known)
Diffusion of responsibility in group production (credit-blame)
Attribution error (blame agent skill, not situation difficulty)
Workers overconfident about luck or productivity

10. 4. Labor supply Basic questions: Does supply rise with wage w?
Participation (days worked) vs hours
A: Very low + supply elasticities for males
…but most data from fixed-hours
Intertemporal substitution
Do workers work long hours during temporary wage increases (e.g. Alaska oil pipeline)? (Mulligan JPE 98?)
Alternative: Amateur “income targeting”

11. Cab driver “income targeting” (Camerer et al QJE 97)

12. Cab driver instrumental variables (IV) showing experience effect

13. Farber (JPE 04) hazard rate estimation: Do hrs worked or accumulated income predict quitting?
Note: If workers are targetting, why isn’t the income distribution more spiky?

14. Do they quit because of hours or $
Do they quit because of hours or $? Getting tired is a stronger regularity than targetting
Note: Which has more measurement error, hours or $?
Big tip experiment!