Field Experiments with Firms
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University of Pennsylvania ScholarlyCommons Management Papers Wharton Faculty Research 2011 Field Experiments With Firms Oriana Bandiera Iwan Barankay University of Pennsylvania Imran Rasul Follow this and additional works at: https://repository.upenn.edu/mgmt_papers Part of the Business Administration, Management, and Operations Commons Recommended Citation Bandiera, O., Barankay, I., & Rasul, I. (2011). Field Experiments With Firms. Journal of Economic Perspectives, 25 (3), 63-82. http://dx.doi.org/10.1257/jep.25.3.63 This paper is posted at ScholarlyCommons. https://repository.upenn.edu/mgmt_papers/99 For more information, please contact [email protected]. Field Experiments With Firms Abstract We discuss how the use of field experiments sheds light on long-standing esearr ch questions relating to firm behavior. We present insights from two classes of experiments—within and across firms—and draw common lessons from both sets. Field experiments within firms generally aim to shed light on the nature of agency problems. Along these lines, we discuss how field experiments have provided new insights on shirking behavior and the provision of monetary and nonmonetary incentives. Field experiments across firms generally aim to uncover firms' binding constraints by exogenously varying the availability of key inputs such as labor, physical capital, and managerial capital. We conclude by discussing some of the practical issues researchers face when designing experiments and by highlighting areas for further research. Disciplines Business Administration, Management, and Operations This journal article is available at ScholarlyCommons: https://repository.upenn.edu/mgmt_papers/99 Journal of Economic Perspectives—Volume 25, Number 3—Summer 2011—Pages 63–82 Field Experiments with Firms Oriana Bandiera, Iwan Barankay, and Imran Rasul iirmsrms ooperateperate iinn ccomplexomplex eenvironments:nvironments: a llistist ooff tthehe ccategoriesategories inin whichwhich ttheyhey nneedeed ttoo mmakeake iinterrelatednterrelated cchoiceshoices wouldwould iincludenclude employeeemployee ppay,ay, F ppricing,ricing, pproductroduct aattributes,ttributes, pproductionroduction ttechnologies,echnologies, aandnd mmanagement.anagement. IInn tturn,urn, tthesehese ddecisionsecisions iinvolvenvolve rrespondingesponding toto ccharacteristicsharacteristics thatthat areare ooftenften hardhard toto mmeasureeasure oorr uuncertain,ncertain, suchsuch asas tthosehose rrelatedelated ttoo marketmarket characteristics,characteristics, thethe produc-produc- ttivityivity ofof iindividualndividual inputs,inputs, aandnd entrepreneurialentrepreneurial ability.ability. DueDue toto thethe complexitycomplexity ofof tthehe eenvironment,nvironment, rresearchesearch tthathat seeksseeks ttoo uunderstandnderstand tthehe bbehaviorehavior ooff fi rmsrms basedbased onon oobservationalbservational ddataata ffacesaces mmanyany cchallengeshallenges aatt uuncoveringncovering ccausalausal rrelationships.elationships. IInn tthishis ppaper,aper, wwee iillustratellustrate howhow fi eeldld experiments,experiments, guidedguided byby economiceconomic theory,theory, cancan addressaddress tthesehese cchallengeshallenges aandnd provideprovide newnew answersanswers ttoo llong-standingong-standing questionsquestions aboutabout fi rms:rms: DDoo fi rrmm cchoiceshoices maximizemaximize pprofirofi tsts ssubjectubject toto cconstraints?onstraints? IfIf so,so, whichwhich constraintsconstraints bbindind aandnd iinformnform ddecisionecision mmakingaking iinn fi rrms?ms? IfIf nnot,ot, wwhyhy areare fi rmsrms operatingoperating insideinside tthehe ffrontier?rontier? IInn tthishis ppaper,aper, wwee rrevieweview fi eldeld experimentsexperiments thatthat provideprovide preliminarypreliminary answersanswers toto tthesehese qquestionsuestions aandnd mmapap ddirectionsirections fforor ffurtherurther rresearch.esearch. WeWe oorganizerganize oourur discus-discus- ssionion iintonto ttwowo cclasseslasses ooff work.work. TThehe fi rstrst isis fi eeldld experimentsexperiments conductedconducted within fi rrms,ms, iinn wwhichhich tthehe uunitsnits ooff oobservationbservation areare wworkersorkers oror ddivisionsivisions ofof a fi rm.rm. TheThe theorytheory bbehindehind mmanyany ooff tthesehese eexperimentsxperiments vviewsiews tthehe fi rmrm asas anan organization,organization, emphasizingemphasizing aagencygency pproblems.roblems. WWee ddiscussiscuss fi eeldld eexperimentsxperiments tthathat sshedhed llightight onon solutionssolutions toto thethe aagencygency pproblem,roblem, ffromrom iincentivencentive ppayay ttoo ssocialocial ppressureressure aandnd nnonmonetaryonmonetary rrewards.ewards. ■ OOrianariana BandieraBandiera isis ProfessorProfessor ofof Economics,Economics, LondonLondon SchoolSchool ofof EconomicsEconomics andand PoliticalPolitical SScience,cience, LLondon,ondon, UUnitednited KKingdom.ingdom. IIwanwan BBarankayarankay iiss AAssociatessociate PProfessorrofessor ooff MManagement,anagement, WWhartonharton SSchool,chool, UniversityUniversity ooff PPennsylvania,ennsylvania, Philadelphia,Philadelphia, PPennsylvania.ennsylvania. IImranmran RRasulasul iiss PProfessorrofessor ooff EEconomics,conomics, UUniversityniversity CCollegeollege LLondon,ondon, LLondon,ondon, UnitedUnited Kingdom.Kingdom. TheirTheir e-maile-mail aaddressesddresses areare 〈[email protected]@lse.ac.uk〉, 〈[email protected]@wharton.upenn.edu〉, aandnd 〈[email protected]@ucl.ac.uk〉. doi=10.1257/jep.25.3.63 64 Journal of Economic Perspectives TThehe ssecondecond sstrandtrand ccoversovers fi eeldld experimentsexperiments conductedconducted between fi rrms,ms, iinn wwhichhich tthehe fi rrmm iiss tthehe uunitnit ooff oobservation.bservation. TheThe ttheoryheory behindbehind mostmost ofof thesethese experimentsexperiments viewsviews tthehe fi rrmm tthroughhrough tthehe llensens ooff nneoclassicaleoclassical productionproduction theory,theory, andand soso wewe ddiscussiscuss hhowow fi eeldld eexperimentsxperiments hhaveave eexogenouslyxogenously variedvaried inputinput availabilityavailability toto shedshed lightlight onon cconstraintsonstraints fi rrmsms fface.ace. TThroughout,hroughout, wwee ffocusocus oonn eexperimentsxperiments ddesignedesigned ttoo sshedhed llightight oonn fi rms’rms’ behavior.behavior. TThishis sstilltill lleaveseaves ooutut a largelarge classclass ofof fi eldeld experimentsexperiments thatthat areare runrun inin collaborationcollaboration wwithith fi rrmsms ttoo pproviderovide eevidencevidence oonn ootherther iissuesssues ssuchuch aass cconsumeronsumer bbehaviorehavior oror ooptimalptimal aauctionuction ddesign.esign.1 BBeyondeyond tthehe rresultsesults ooff sspecifipecifi c fi eeldld experimentexperiment studies,studies, wewe alsoalso believebelieve thatthat eeconomistsconomists ccanan rreapeap eenormousnormous bbenefienefi tsts fromfrom establishingestablishing workingworking partnershipspartnerships wwithith fi rrmsms aandnd eengagingngaging iinn pprimaryrimary ddataata ccollection.ollection. TThus,hus, wwee cconcludeonclude tthehe ppaperaper bbyy oofferingffering ssomeome ddiscussioniscussion ooff tthehe ppracticalractical iissuesssues rresearchersesearchers ffaceace iinn ddesigningesigning aandnd iimplementingmplementing fi eeldld eexperimentsxperiments inin fi rms,rms, andand bbyy hhighlightingighlighting researchresearch questionsquestions tthathat rremainemain rrelativelyelatively uuntouchedntouched bbyy fi eldeld eexperiments.xperiments. WeWe hhopeope thatthat bbyy thethe eendnd ofof oourur ddiscussion,iscussion, rreaderseaders hhaveave a clearclear ssenseense ofof thethe costscosts andand benefibenefi tsts ofof fi eldeld experi-experi- mmentsents iinn fi rrmm ssettings,ettings, aandnd aarere mmotivatedotivated ttoo cconsideronsider tthishis aapproachpproach tthemselves.hemselves. FFieldield EExperimentsxperiments wwithinithin FFirmsirms FFieldield eexperimentsxperiments wwithinithin fi rrmsms aarere generallygenerally designeddesigned toto shedshed lightlight onon howhow fi rrmsms ccanan ssolveolve aagencygency pproblemsroblems aandnd motivatemotivate theirtheir employees.employees. InIn thisthis section,section, wewe rrevieweview eevidencevidence oonn thethe twotwo cclassicallassical ssolutionsolutions ttoo tthishis aagencygency problem—monitoringproblem—monitoring aandnd ppayay fforor pperformance—aserformance—as wwellell aass mmoreore rrecentecent wworkork oonn nnonmonetaryonmonetary ddetermi-etermi- nnantsants ooff mmotivationotivation ssuchuch aass ssocialocial rrelationselations oorr sstatustatus rrewards.ewards. AAlthoughlthough fi eeldld eexperimentsxperiments wwithinithin fi rmsrms havehave experiencedexperienced a recentrecent resurgence,resurgence, ttheyhey aarere farfar ffromrom nnew.ew. OOnene ofof tthehe fi rrstst sserieseries ofof fi eldeld eexperimentsxperiments waswas conductedconducted atat tthehe HHawthorneawthorne pplantlant ooff tthehe WWesternestern EElectriclectric Company,Company, nnearear CChicago,hicago, iinn thethe 1920s.1920s. WWhilehile tthehe vvalidityalidity ooff ttheirheir sspecifipecifi c fi ndingsndings hashas bbeeneen questioned,questioned,2 tthesehese eexperimentsxperiments llayay tthehe ggroundworkroundwork fforor manymany iissuesssues tthathat aarere nnowow cconsideredonsidered ppartart ooff mainstreammainstream ppersonnelersonnel eeconomicsconomics ((BloomBloom aandnd VVanan RReenen,eenen, 22010a).010a). FForor eexample,xample, ttheyhey lleded MMayoayo ((1933)1933) ttoo sstresstress tthathat wworkersorkers aarere mmotivatedotivated bbyy