1. Motivations in Labor Economics A Critical Survey Tommaso Reggiani 24 March 2010 PhD Course: Topics in Information Economics F. Barigozzi, spring 2010

2. Research Question “How can a principal extract the highest level of effort from an agent?” My aim is to review and describe in which ways the economic theory has answered this question during last 30 years.

3. Summary Standard Agency Model (Shavell 1979) Gift Exchange (Akerlof 1982) Efficiency Wages (Shapiro,Stiglitz 1984) Intrinsic Motivations (Kreps 1997) - self image (Benabou,Tirole 2003/2006) - pro-social contribution (Francois 2000; Heyes 2005) - example (Nyborg, Brekke 2008)

4. Notes (i)I’ll try to provide you just the models’ intuitions. (ii) I’ll deliver you all models using a common (simplified) notation to allow you to better understand links among different papers.

5. Agency Model (Shavell 1979) Extrinsic Motivations: Homo Oeconomicus Employer : Employee: Principal-Agent problem How to obtain the desired level of effort?  Incentives to align the objective function: exploiting the trade-off “ incentives vs insurance ”

6. First Best Hp: (i) No outcome uncertainty (ii) Perfect Monitoring is feasible The employer sells the firm to the employee for a fixed rate [ ] letting her to get all [ ] the value of her production [ ] (e.g. taxi drivers in NYC (Camerer 1997) )

7. Second Best Issues: (i) Uncertainty - Risk Aversion (ii) Imperfect Monitoring The employer assures to the employee a fixed part of wage [ ] indipendentely from the actual output produced (risk avesion), letting her to get only a fraction [ ] of the value of her production [ ]

8. Gift Exchange (Akerlof 1982) Behavioral Approach (Sociological) Principal-Agent cooperation - Imperfect Monitoring Employer: Employee: Partial Equilibrium Model How to obtain the desired level of effort ?  reciprocal “Gift Exchange” between employer and employee to promote bilateral cooperation

9. Employer sets this wage profile Employee responds with ‘positive reciprocity’ (Fehr 2000) The additional effort exerted “effort gift” [ ] is more than proportional wrt the “wage gift” provided by the principal [ ]

10. Efficiency Wage (Shapiro,Stiglitz 1984) Standard Econ Framework  Behavioral Approach Principal-Agent problem - Imperfect Monitoring Employer: Employee: General Equilibrium Model ; Involuntary Unemployment How to obtain the desired level of effort ?  “Threat” t, imposing an explicit cost to the fired employee (in equilibrium unemployment does’t exist an all wages are equal  shirking is optimal): (i) unemployment + (ii) lower outside-option wage

11. Employer sets this wage profile Employee responds to the threat to be fired, with higher level of effort, since if fired she will loose the “wage premium” [ ] getting a lower wage in the outside option [ ]

12. Intrinsic Motivations (Kreps 1997) Behavioral-Psychological Approach Employer: Employee: How to obtain the desired level of effort ? The term leads to a strong complementarity between principal’s goal and agent’s behavior Now the problem isn’t the one to incentive effort, but to select the motivated agent.

13. Self Image: Impure Altruism (Andreoni 1990) Reputational Concerns (Benaou,Tirole 2003/2006/2009)  Corporate Social Responsibility Pro-social Contribution: Pure Altruism (Andreoni 1988) Vocation (Heyes 2005); Public Good Provison (Francois 2000)  Non Profit Organisation

14. (Benabou,Tirole 2003/2006) Self Image: It is when an agent performs a task to show her virtuous behavior. -In this case direct monetary tools to incentivate this behaviour lead to a motivational crowing-out (Frey 2001) since the symbolic component of this task is neutralized by the pecuniary incentive. -It is possible to “promote” this behavior adopting public awards (Frey 2009, Benabou 2010)

15. (Francois 2000; Heyes 2005) Pro-social Contribution It is when an agent performs a task obtaining direct utility since she contributes to a desirable outcome/mission (principal’s goal). -In this case since agent and principal’s outcome are already aligned, principal doesn’t need to incentivate, but only to select the motivated agent (Prendergast 2009)

16. Example: Bakers vs Nurses (Nyborg,Brekke 2008) Sectors: -Private (bakers - goods) -output verifiable  shirking isn’t feasible -Public (nurses - services) - output isn’t verifiable  shirking is feasible  self image / pro-social contr.

17. Employer: Employee: Due to shirking, Heyes’ model does’t work! (Heyes 2005)

18. Solution: (dis)utility from “capital” investments - equipment - k : pos./neg. (i) highly motivated agents are better off since they can perform better, (ii) medium motivated are better off since k lowers their cost of effort, (iii) not motivated are worse off since with better equipment they have less room for shirking.

19. References 1.Shavell, 1979. "Risk Sharing and Incentives in the Principal and Agent Relationship," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 55-73, Spring.Risk Sharing and Incentives in the Principal and Agent RelationshipBell Journal of Economics 2.Akerlof, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, MIT Press, vol. 97(4), pages 543-69, November.Labor Contracts as Partial Gift ExchangeThe Quarterly Journal of Economics 3.Shapiro-Stiglitz, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433- 44, June.Equilibrium Unemployment as a Worker Discipline Device American Economic Review 4.Kreps, 1997. "Intrinsic Motivation and Extrinsic Incentives," American Economic Review, American Economic Association, vol. 87(2), pages 359-64, May.Intrinsic Motivation and Extrinsic IncentivesAmerican Economic Review 5.Benabou-Tirole, 2003. "Intrinsic and Extrinsic Motivation," Review of Economic Studies, Blackwell Publishing, vol. 70(3), pages 489-520, 07.Intrinsic and Extrinsic MotivationReview of Economic Studies 6.Francois, 2000. "Public service motivation' as an argument for government provision," Journal of Public Economics, Elsevier, vol. 78(3), pages 275-299, November.Public service motivation' as an argument for government provisionJournal of Public Economics 7.Heyes, 2005. "The economics of vocation or 'why is a badly paid nurse a good nurse'?," Journal of Health Economics, Elsevier, vol. 24(3), pages 561-569, May.The economics of vocation or 'why is a badly paid nurse a good nurse'?Journal of Health Economics 8.Nyborg-Brekke, 2008. "Selfish Bakers, Caring Nurses? A Model of Work Motivation”, HERO, WP n.1/2008.Selfish Bakers, Caring Nurses? A Model of Work Motivation