Industrial Politics Competition

1
Chapter 10

• Industrial Politics - Competition

2
Reading for next class

• http//www.slate.com/id/2155741/?navtap3

3
Opinion Poll

• Suppose the person who gets the top score on the
  final for this course will win a trip to Hawaii
• Suppose your roommate missed the class that
  covered the practice final, and asks for your
  notes
• Which of the actions below would you take?
• A. Lend her your notes to photocopy
• B. Sell her your notes
• C. Pretend that you lost them
• D. Lend her a set of notes with wrong answers

4
Problems with Tournaments

• Chapter 10 - Problems with Pay based on
  Competition (e.g., Tournaments)
• Chapter 12 Problems with pay based on
  Cooperation (e.g., Teams)
• Focus first on problems due to competition

5
Competition

• Competition in a company can be destructive
• Examples
• Enron embraced competition
• Entire workforce built on tournaments
• Also called superstar system
• McKinsey management consultants pushed this
  system
• Little cooperation goal was to find and promote
  superstars
• No one knew what anyone else was doing
• Wal-mart, Proctpr and Gamble
• Greater focus on cooperation

6
Evidence

• Pay raises for promotion do appear to reduce
  cooperation among workers
• Drago and Garvey Workers are less likely to let
  other workers share their equipment, tools, or
  machinery when there are large pay raises
  associated with promotions based on relative
  performance

7
Clip The Apprentice

• http//www.youtube.com/watch?veKM8624cFn0

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Chapter Themes

• If wage gains for promotion encourage effort, but
  discourage cooperation, then
• How and when should cooperation be encouraged?
• Which types of workers should be rewarded
  according to which pay schemes?
• Should different types of workers be mixed
  together?

9
Tournaments with sabotage

• Two workers, j and k
• Worker with larger output becomes boss and gets
  w1gtw2,
• Output.qimi- siei
• mi effort
• ei noise
• si is sabotage effort
• Sabotage reduces output
• C(mi , si) effort cost
• Sabotage takes effort

• New wrinkle
• Two types of workers
• Doves and Hawks
• Doves are incapable of sabotage
• Hawks will sabotage to maximize utility

10
Firms Decision

• Max p(qJqk)-(w1w2) w1,w2s.t. (w1w2)/2c(m)
• Assume workers same type (so identical choices)
• mmJmk, ssjsk,
• In expectation, firm maximizes,
• Max 2(m - s)-(w1w2)w1, w2s.t. (w1w2)/2c(m)

• F.O.C.sHawks
• Doves
• Cmp for Doves
• Cmltp for Hawks

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Smaller prizes for hawks

• Cmp for Doves
• Cmltp for Hawks
• m??Cm? (Increasing marginal disutility of effort)
• This means doves exert more effort than hawks in
  equilibrium
• Firms make w1-w2 smaller for hawks (to elicit
  less effort).
• Intution Wage gap causes destructive behavior as
  well as eliciting effort, so optimal wage gap is
  smaller for hawks

12
Implications

• Wage compression appropriate when workers can
  harm one another or when cooperation is needed
• It is better to segregate workers by type, hawks
  with hawks, doves, with doves, because these two
  types have different optimal pay schemes.
• Workers will not self-sort
• Hawks will want to pretend to be doves

13
Other solutions

• Induce competition among workers on different
  teams
• Group people who need to cooperate on the same
  team
• Basketball example
• If you give bonus for top point scorer, then no
  one will provide assists or waste energy playing
  defense
• One solution is to form two teams and give the
  bonus to the team that plays better
• More generally, you could just pay workers a
  percentage of the output of the company (or
  team)
• But this also has problems, and leads us to.

14
Chapter 12

• Teams

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Themes

• When should teams be used?
• How can firms motivate workers to perform in a
  team environment?
• When do workers care about team vs individual
  performance?
• How does peer pressure operate in a team context?
• What is the team structure that results in max
  profit?

16
Question 1

• You go out for pizza with 9 friends.
• You have agreed to split the total bill equally
  among the 10 of you.
• You consider buying a Mojito, which costs 10
• Your usual choice ( a low quality, watery,
  fizzless formaldehyde-tasting discount beer)
  costs 4
• How much extra does it cost you to buy the Mojito
  tonight?
• A. 6 dollars
• B. Nothing
• C. 60 cents
• D. 3 dollars
• Free-riding leads to overconsumption
• You consume more than you would have, given your
  true valuation for the good and its true cost

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Question 2

• You have 9 other coworkers on your team
• For every unit of output the team produces above
  quota, the firm pays the team a bonus of 60
• The team has already met its quota. If you work
  late, you can increase the teams output by one
  unit.
• How much extra do you earn if you work late?
• A. 60 dollars
• B. Nothing
• C. 6 dollars
• D. 3 dollars
• Free-riding leads to underprovision of effort
• You invest less effort than you would have, given
  your true effort cost and the true benefit to the
  firm of your effort

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Free-riding

• When workers work in teams and teams are
  compensated, workers do not get the full benefit
  of their effort.
• Therefore they underinvest.
• Previous example. Your effort was worth 60 to
  the firm, but you would only get 6
• Example 2. Team projects in college.
• You do all the work
• Slacker in your group gets the same grade.
• Sidebar1 Person with highest valuation of grades
  does most of the work.
• Sidebar2 Roommate who hates messiness the most
  is the one who cleans the toilet.

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Why not pay individuals, instead of teams?

• Output sometime hard to measure
• What is output of a manager?
• What is output of 1 individual on an assembly
  line?
• COMPETITION
• Workers behave selfishly, to detriment of the firm

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When to Use Teams

• Individual output hard to measure
• Large complementarities between what one worker
  does and what another worker does
• Whole greater than sum of parts
• Example Moving a piano

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Teams and Knowledge Transfer

• Teams can create valuable knowledge transfer,
  given 2 conditions
• Members have idiosyncratic information
• Idiosyncratic information possessed by one member
  valuable to others

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Example 1

• Accountant and Auto Mechanic
• No room for knowledge transfer
• Little common info - lots of idiosyncratic info
• Unrelated to others task

Auto mechanics information set
Accountants Information Set
Auto mechanics tasks
Accountants tasks
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Example 2

• Accountant 1 and Accountant 2
• Lots of common info, some idiosyncratic info
• Unrelated to others task

Tasks
1s InformationSet
2s information set
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Question

• Sales team with 2 workers. Worker 1 and worker 2
• One knows clients better, other knows products
  better
• Which worker has his productivity raised?
• 1. 1
• 2. 2
• 3. Both
• 4. Neither

1s InformationSet
1s Tasks
2s information set
2s Tasks
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Team size and information transfer

• Large teams
• Communication problems
• Bureaucracy, cliques, confrontation, wasted time
• Example Rockwell
• Small teams
• Not much gain from information transfer