Managerial Efficiency
Experimental examination of the incentive and sorting effects of pay-for-performance on creative performance
Ji Hyun Kim
Journal of Applied Psychology, forthcoming
Abstract:
There is long-standing debate over whether pay-for-performance (PFP) enhances or undermines creative performance. Traditional motivation and revised creativity theories suggest that PFP and intrinsic task interest combine additively to enhance creative performance, whereas cognitive evaluation theory and self-determination theory posit that PFP undermines task interest and thus intrinsic motivation and creative performance. To help resolve these conflicting predictions and provide a more comprehensive understanding of how and when PFP influences creative performance, this study incorporates both the incentive and sorting mechanisms of PFP, varying strengths of PFP, and task autonomy as a key moderator. A novel laboratory experiment was designed to capture key elements of workplace contexts, including in the design of the creative tasks, PFP strengths based on benchmarking of U.S. companies' practices, and allowing subjects to sort into different pay conditions, consistent with the opportunity for mobility in the labor market. The results showed that, through both incentive and sorting mechanisms, high PFP intensity enhanced creative performance more so than low PFP intensity, and both were superior to fixed pay. Importantly, task autonomy positively moderated the PFP-creative performance relationship, such that creative performance under PFP increased much more under higher task autonomy. Finally, the difference in creative performance under PFP versus fixed pay was greater when subjects were allowed to sort into their preferred pay conditions than when they worked only under randomly assigned pay conditions. Theoretical and practical implications and future research directions are discussed.
Artificial Intelligence, Scientific Discovery, and Product Innovation
Aidan Toner-Rodgers
MIT Working Paper, November 2024
Abstract:
This paper studies the impact of artificial intelligence on innovation, exploiting the randomized introduction of a new materials discovery technology to 1,018 scientists in the R&D lab of a large U.S. firm. AI-assisted researchers discover 44% more materials, resulting in a 39% increase in patent filings and a 17% rise in downstream product innovation. These compounds possess more novel chemical structures and lead to more radical inventions. However, the technology has strikingly disparate effects across the productivity distribution: while the bottom third of scientists see little benefit, the output of top researchers nearly doubles. Investigating the mechanisms behind these results, I show that AI automates 57% of "idea-generation" tasks, reallocating researchers to the new task of evaluating model-produced candidate materials. Top scientists leverage their domain knowledge to prioritize promising AI suggestions, while others waste significant resources testing false positives. Together, these findings demonstrate the potential of AI-augmented research and highlight the complementarity between algorithms and expertise in the innovative process. Survey evidence reveals that these gains come at a cost, however, as 82% of scientists report reduced satisfaction with their work due to decreased creativity and skill underutilization.
Within-Firm Partisanship and Innovation
Matthew Henriksson & Anthony Rice
University of Tennessee Working Paper, April 2024
Abstract:
Matching inventors to their voter records, we analyze how individual partisanship within firms influences inventor productivity and turnover. Across 3,367 public and 91,960 private U.S. firms, we find no productivity benefits from partisan diversity. Inventors apply for and are granted more patents when they are more politically similar to their coworkers. Moreover, politically-diverse teams of inventors do not produce patents of superior quality. Regarding inventor turnover, inventors who are less politically aligned with their coworkers are more likely to leave their firm. Together, the evidence suggests that partisan diversity within firms may lead to increased turnover and lower productivity.
Secret Innovation
Michael Joseph & Michael Poznansky
International Organization, forthcoming
Abstract:
Conventional wisdom holds that open, collaborative, and transparent organizations are innovative. But some of the most radical innovations -- satellites, lithium-iodine batteries, the internet -- were conceived by small, secretive teams in national security agencies. Are these organizations more innovative because of their secrecy, or in spite of it? We study a principal-agent model of public-sector innovation. We give research teams a secret option and a public option during the initial testing and prototyping phase. Secrecy helps advance high-risk, high-reward projects through the early phase via a cost-passing mechanism. In open institutions, managers will not approve pilot research into high-risk, high-reward ideas for fear of political costs. Researchers exploit secrecy to conduct pilot research at a higher personal cost to generate evidence that their project is viable and win their manager's approval. Contrary to standard principal-agent findings, we show that researchers may exploit secrecy even if their preferences are perfectly aligned with their manager's, and that managers do not monitor researchers even if monitoring is costless and perfect. We illustrate our theory with two cases from the early Cold War: the CIA's attempt to master mind control (MKULTRA) and the origins of the reconnaissance satellite (CORONA). We contribute to the political application of principal-agent theory and studies of national security innovation, emerging technologies, democratic oversight, the Sino-American technology debate, and great power competition.
Promotions, Adverse Selection, and Efficiency
Michael Waldman & Zhenda Yin
Journal of Labor Economics, forthcoming
Abstract:
We consider how adverse selection affects the efficiency of turnover and postturnover job assignments. In the model, when a high-ability worker is not promoted at the worker's current employer because of a lack of available managerial openings, it is efficient for the worker to move to a firm seeking a high-ability worker to promote. But this type of turnover does not occur given asymmetric information and adverse selection. We show that up-or-out contracts can be an efficient response to this inefficiency, where our analysis matches several observations concerning real-world promotion decisions and practices related to up-or-out.
Do pay secrecy policies prevent voluntary turnover?
Carlos Acuna
Industrial Relations, forthcoming
Abstract:
Pay secrecy (PS) policies, commonly found in the US private sector, restrict pay communication among employees. Previous research suggests that these policies help prevent pay dissatisfaction and attrition among low earners by limiting salary comparisons. However, by exploiting the staggered adoption of PS bans across US states as a negative shock to PS, I find no causal relationship between PS and voluntary turnover. This suggests that workers' reluctance to ask others about their pay renders PS policies irrelevant for retention purposes. This, in turn, highlights the need for organizations to consider alternative approaches to enhance employee retention and commitment.
Flexible Pay and Labor Supply: Evidence from Uber's Instant Pay
Keith Chen, Katherine Feinerman & Kareem Haggag
NBER Working Paper, November 2024
Abstract:
Modern tech platforms provide workers real-time control over when they work, and increasingly, flexible pay: the option to be paid immediately after work. We investigate the labor supply effects of pay flexibility and the implications of present-biased preferences among gig-economy workers. Using granular data from a nationwide randomized controlled trial at Uber, we estimate the effects of switching from a fixed weekly pay schedule to Instant Pay, a system that allows on-demand, within-day withdrawals. We find that flexible pay substantially increased drivers' work time. Furthermore, consistent with present bias, the response is significantly higher when drivers are further away from the end of their counterfactual weekly pay cycle. We discuss welfare and broader implications in contexts in which workers have the ability to flexibly supply labor.
Scalable versus Productive Technologies
Sergio Salgado et al.
University of Pennsylvania Working Paper, November 2024
Abstract:
Do larger firms have more productive technologies, are their technologies more scalable, or both? We use administrative data on Canadian and US firms to estimate a joint distribution of output elasticities of capital, labor, and intermediate inputs -- thus, returns to scale (RTS) -- along with total factor productivity (TFP). We find significant heterogeneity in RTS across firms within industries. Furthermore, larger firms operate technologies with higher RTS, whereas the largest firms do not exhibit the highest TFP. Higher RTS for large firms are entirely driven by higher intermediate input elasticities. Descriptively, these align with higher intermediate input revenue shares. We also show that high-RTS firms grow faster, pay higher wages, and are owned by wealthier households. We then incorporate RTS heterogeneity into the workhorse model of endogenous entrepreneurship that matches the observed heterogeneity in TFP and RTS. We find that the efficiency losses from financial frictions are more than twice as large compared to a conventional calibration that attributes all heterogeneity to TFP and assumes a common RTS parameter.
Love of Work or Love and Work: Does a Business Owner's Compulsion to Work Pay Off?
Renee Wiatt, Maria Marshall & Yoon Lee
Journal of Family and Economic Issues, December 2024, Pages 925-938
Abstract:
A business owner's compulsion to work is a condition that can have jarring effects on business-owning families. A compulsion to work has been defined as a component of workaholism. A random sample of 478 small business owners in the United States were classified as "compulsive" and "non-compulsive" owners using cluster analysis. A probit regression was used to determine the characteristics associated with being a compulsive owner. The probability of being a compulsive owner was lower for female owners, was higher as the number of children in the house increased, and was inversely related to family-business functioning. Further analysis found that compulsive owners did not have higher business incomes than non-compulsive owners. Thus, a compulsion to work did not appear to pay off for small business owners. We contribute to the literature by identifying factors associated with compulsive owner tendencies and if those tendencies lead to higher business income.
Jekyll and Hyde leadership: Examining the direct and vicarious experiences of abusive and ethical leadership through a justice variability lens
Haoying (Howie) Xu et al.
Journal of Applied Psychology, forthcoming
Abstract:
Drawing on uncertainty management theory and the nascent work on justice variability, we examine employees' direct and vicarious experiences of abusive supervision and ethical leadership. Conceptualizing the simultaneous display of abusive and ethical leadership styles as a form of justice variability, we suggest that a direct supervisor's ethical leadership exacerbates, rather than ameliorates, the detrimental effects of his/her abusive supervision on employees' emotional exhaustion and job performance. We further contend that a similar effect exists when employees vicariously experience leadership interactions involving their direct supervisor and higher level manager, whereby higher level managers' ethical leadership exacerbates the negative effects of their abusive supervision toward supervisors on those supervisors' employees' emotional exhaustion and job performance. We draw the contrast between the direct and vicarious experiences by theorizing justice uncertainty and linking-pin effectiveness uncertainty, respectively, as two distinct theoretical mechanisms that explain the two proposed destructive effects. Using a multisource and multiphase lagged field study and two vignette-based experiments, we find general support for our model. Our research advances the theories of justice variability, vicarious leadership and (in)justice, and supervisors' linking-pin role effectiveness. We also offer practical insights for managing "Jekyll and Hyde" leadership across organizational hierarchies.