Review

1
Review

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Reading for next class

• http//online.wsj.com/article/SB123154037321769313
  .html
• http//www.wired.com/techbiz/it/magazine/17-03/wp_
  quant?currentPageall

3
Question on reading

• According to New Yorker article, when given a
  hypothetical situation in which they need to
  improve a department, bad managers tend to say
  they would
• a) Always delegate to the most junior person who
  can be trusted with the task.
• b) Give your superiors frequent progress reports.
  
• c) Announce a major reorganization of the
  department that includes getting rid of whomever
  you believe to be dead wood.
• d) Concentrate more on your people than on the
  tasks to be done.
• e) Make people feel completely responsible for
  their work.

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Question 1

• 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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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 2000
  and this is divided equally
• 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. 2000 dollars
• B. Nothing
• C. 200 dollars
• D. Cant tell
• 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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Chapter 8, contd

• Teams

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Problem

• If workers paid based on individual results
  (e.g., tournaments, piece rates) then
• Harmful competition can result
• If workers paid based on team performance then
• Free-riding can result

8
Incentives in Teams

• Explicit
• Profit sharing
• Stock options
• Implicit and non-monetary
• Norms

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Question on Slate reading

• Supermarket checkers worker harder when they are
  surrounded by
• A. Fast workers
• B. Slow workers
• C. Fast workers facing them
• D. Fast workers facing away from them

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Profit-sharing

• Suppose N workers are paid 1/N of profit or (net
  revenues)
• Simplest example No non-wage costs, no wages,
  worker simply gets her cut of profits
• f(e1, e2, eN) production
• C(ei) cost of effort for worker i.
• Worker iMax f(e1, e2, eN)/N-C(ei)ei
• F.O.Cfi(e1, e2, eN)/Nc(ei)MB MC

• But this is not optimal
• At profit maxMax f(e1, e2, eN)-(C(e1)C(e2)C
  (eN))
• Choose e1, e2, eN
• F.O.C.sfi(e1, e2, eN)c(ei)MB MC
• Free rider problem formalized!
• Profit-sharing provides very little effort
  incentive

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One approach to free-rider problem Peer pressure

• Worker iMax f(e1, e2, eN)/N - ? (eothers-ei)
  - C(ei)
• ? is penalty imposed on me for working less than
  the norm
• F.O.C.
• fi(e1, e2, eN)/N ? c(ei) MB MC
• Makes worker work harder
• At social optimum fi(e1, e2, eN)c(ei)
• fi(e1, e2, eN)/N ? c(ei), so can reach
  optimum if
• ? fi(e1, e2, eN)(N-1)/N

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Manufacturing Morale

• Shirking by worker on straight salary always
  hurts someone
• Loss to shareholders!
• But workers have trouble empathizing with
  shareholders
• Big, rich company
• Same logic shoplifters use The store is rich
• Easier for workers to feel bad hurting someone
  they know
• Other workers!
• Norms and peer pressure work better in smaller
  groups
• Easier to observe and penalize shirkers
• Easier to empathize

• Company goal Create empathy, loyalty, and
  guilt
• Example 1 Quality circles
• Workers discuss best way to perform certain tasks
• Offer input, suggestions
• Suggestions are almost never implemented
• More useful as means to create loyalty
• Example 2 Kelsey Grammer and The Magic Pan

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Clips

• http//www.youtube.com/watch?vJ5wEke-0R8Q
• http//www.livevideo.com/video/47EA520EEDA8453E856
  BF32CBD575366/fedex-burn.aspx

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Peer pressure can also cause shirking!

• Worker iMax f(e1, e2, eN)/N ? (eothers-ei)
  - C(ei)
• ? is penalty imposed on me for working more than
  the norm
• F.O.C.
• fi(e1, e2, eN)/N- ? c(ei) MB MC
• Makes worker work less!
• This form of pressure has been well documented
  among production workers

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Other Explicit Team Incentives

• Compensate managers based on their performance
  and the performance of those they supervise
• Managers get percentage of revenues generated by
  each member
• Upside
• Fosters cooperation and compensates manager for
  effort
• Problems
• Only useful when managers do increase prod of
  workers
• Often used as gimmick Multi-level marketing

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Multi-level marketing