Zurich Open Repository and Archive University of Zurich Main Library Strickhofstrasse 39 CH-8057 Zurich www.zora.uzh.ch Year: 2011 Essays in organizational and personnel economics Herz, Holger Andreas Posted at the Zurich Open Repository and Archive, University of Zurich ZORA URL: https://doi.org/10.5167/uzh-139139 Dissertation Published Version Originally published at: Herz, Holger Andreas. Essays in organizational and personnel economics. 2011, University of Zurich, Faculty of Economics. Essays in Organizational and Personnel Economics Dissertation for the Faculty of Economics, Business Administration and Information Technology of the University of Zurich to achieve the title of Doctor of Philosophy in Economics presented by Holger Herz from Rastatt, Germany approved in April 2011 at the request of Prof. Dr. Ernst Fehr Prof. Dr. Jacob Goeree The Faculty of Economics, Business Administration and Information Technology of the University of Zurich hereby authorises the printing of this Doctoral Thesis, without thereby giving any opinion on the views contained therein. Zurich, April 6th 2011 Chairman of the Doctoral Committee: Prof. Dr. Dieter Pfaff Acknowledgments ACKNOWLEDGMENTS During my undergraduate studies of economics at the University of Mannheim, I have been puzzled by the lack of integration of psychological insights into the field of economics. While I understood the advantages of a simple and parsimo- neous approach towards the understanding of human behavior, the standard eco- nomic model that exclusively focussed on own payoffs and extrinsic forms of mo- tivation has never fully convinced me. During my studies abroad at the University of California in Berkeley, I was fortunate to take classes with some of the great- est teachers of economics. George Akerlof opened up new horizons by showing me how psychology and sociology can be integrated into macroeconomic models. Botond Koszegi taught me how psychology informs economics and how the two disciplines can be linked to each other, and Teck-Hua Ho and Shachar Kariv in- troduced me to the power of economic experiments as an empirical method for testing economic theory. During my stay in Berkeley and thanks to the abovemen- tioned professors, I developed a strong passion for behavioral and experimental economics and came to the conviction to pursue research in precisely this field. Once more I was very fortunate to get the opportunity to join Ernst Fehr’s research group in order to pursue a doctorate in economics at the University of Zurich. The opportunities and research facilities provided in Zurich proved to be an experimental economist’s dream. It gave me the opportunity to start my re- search career in an ideal environment. The results of my efforts during four and a half years as a doctoral student in Zurich are presented in this thesis. I am deeply grateful to numerous people who have supported me in my work throughout the years and who made my time as a doctoral student in Zurich a truely pleasant experience. First an foremost, I want to thank my supervisor Ernst Fehr for his guidance and patience throughout my doctoral studies. I greatly ben- efitted from his knowledge and foresight in choosing the right topics for my dis- sertation and I owe to him much of what I know about the science of economic experiments. I am also indebted to Bjorn¨ Bartling, Daniel Schunk, Tom Wilkening and Christian Zehnder, with whom I strongly interacted during my doctoral stud- ies, who guided me in my efforts and with whom I started joint research projects -iii- Acknowledgments the results of which are presented in the three chapters of this thesis. Many other people have in one way or another contributed to my work on this thesis. I want to thank my office mates Alain Cohn and Michel Marechal with whom it was always fun being at work and I very much enjoyed working with them for all the years. I want to thank Urs Fischbacher and Stefan Schmid for their support with z-tree, the brilliant experimental economics software that enabled me to conduct my research and without which probably none of the projects presented in this thesis would have been feasible. I am also indebted to many current and for- mer members of the Department of Economics at the University of Zurich for their constant support and exchange of ideas, in particular Charles Efferson, Jacob Go- eree, Lorenz Gotte,¨ Christian Hepenstrick, Michael Kosfeld, Andreas Leibbrandt, Ryan McKay, Nick Netzer, Bastiaan Oud, Fred´ eric´ Schneider, Philippe Sulger, Sonja Vogt, Ferdinand von Siemens, Tony Williams and Jean-Philippe Wullrich.¨ I really enjoyed the many discussions with them that shaped the ideas that ultimatey lead to the research projects presented in this thesis. I am also thankful to Sally Gschwend, Petra Meier and Helen Bernhard for their administrative support and Franziska Heusi, Nina Spiri and Claudia Paixao for their help organizing and running experiments. Their support and effort made my life as an experimental researcher in Zurich very pleasant. Finally, I want to thank my parents Wolfgang and Evelyn Herz for their uncon- ditional support throughout my whole life. Their encouragement and care helped me enormously in reaching my goals and this dissertation is dedicated to them. Holger Herz Zurich,¨ January 2011 -iv- TABLE OF CONTENTS Acknowledgments .................................... iii Introduction ....................................... 1 1. The Lure of Authority: Motivation and Incentive Effects of Power . 6 1.1 Introduction . 7 1.2 The Model . 13 1.2.1 Analysis and Theoretical Implications . 15 1.3 The Experiment . 17 1.3.1 The Authority Game . 17 1.3.2 Experimental Design and Hypotheses . 20 1.3.3 Procedures . 23 1.4 Experimental Results . 24 1.4.1 The Main Facts . 24 1.4.2 Exploring the principals’ reluctance to delegate . 28 1.4.3 Exploring the controlling parties’ over provision of effort . 35 1.4.4 Exploring the subordinate parties’ under provision of effort . 39 1.4.5 The motivational and demotivational forces of authority: Rul- ing out alternative explanations . 42 1.5 Conclusion . 45 1.6 Appendix . 48 1.6.A Additional Tables . 48 1.6.B Measuring Loss Aversion . 49 1.6.C Loss Aversion and Effort . 50 1.6.D Risk Aversion and Effort . 52 1.6.E The impact of decision errors on effort choices . 55 2. The Value of Authority ............................... 58 2.1 Introduction . 59 2.2 Experimental Design . 65 2.2.1 The Authority Game . 66 2.2.2 Lotteries . 68 v 2.2.3 Procedures . 70 2.3 Theory . 71 2.3.1 Theoretical analysis under the assumption of individual ma- terial payoff maximization . 71 2.3.2 Generalization of the theoretical analysis . 73 2.3.3 Introducing a monetary measure of the intrinsic value of au- thority . 76 2.3.4 Measurement of loss aversion . 79 2.4 Results . 80 2.4.1 Is there an intrinsic value of authority? . 80 2.4.2 Heterogeneity across different authority games . 82 2.4.3 Heterogeneity in the intrinsic value of authority across indi- viduals . 85 2.5 Conclusion . 89 2.6 Appendix . 91 2.6.A Measuring Loss Aversion . 91 2.6.B Illustrating the Measure for the Value of Authority . 92 2.6.C Using Expected Values instead of Certainty Equivalents . 95 2.6.D Discussion of alternative designs . 98 3. Judgemental Overconfidence and Innovative Activity - Evidence from the Lab and from the Field ....................................105 3.1 Introduction . 106 3.2 Theoretical Framework . 111 3.2.1 Solving the Model . 113 3.3 Experiment . 116 3.3.1 Procedures and Subject Pool . 116 3.3.2 The Ice Cream Stand Experiment . 117 3.3.3 Judgemental Overconfidence . 121 3.3.4 Ambiguity Aversion . 122 3.3.5 Raven’s IQ . 123 3.3.6 Creativity . 123 3.4 Hypotheses . 124 3.5 Results . 126 3.6 External Validity of the Experimental Task . 131 3.6.1 External Datasources . 132 3.6.2 Results . 134 3.7 Conclusion . 137 vi Appendix 139 A. Appendix to Chapter 1 ...............................140 A.1 Instructions . 140 B. Appendix to Chapter 2 ...............................160 B.1 Instructions Authority Game . 160 B.2 Instructions Lottery Experiment . 176 C. Appendix to Chapter 3 ...............................186 C.1 Questionnaires given to the supervisors and the HR department . 186 C.2 Instructions . 190 Bibliography .......................................193 Curriculum Vitae ....................................201 vii Introduction INTRODUCTION The standard economic approach to study human behavior is based on the as- sumption that humans are rational actors who always behave in a utility maximiz- ing fashion. Utility is usually represented in mathematical terms, which allows to make unambiguous predictions with regard to behavior that are empirically falsifiable. However, the approach has its obvious limitations because models of economic behavior have to remain mathematically manageable. The prerequisite of mathematical tractability has constrained economists to keep models of human decision making fairly simple, which inescapably lead to a model of human de- cision making that is based on oversimplified assumptions. The usual defense of economists to this kind of criticism is that economics is not primarily interested in getting the assumptions of the model right, but in making correct predictions about behavior. Hence, economists built so called “as-if” models, which need not be based on correct assumptions as long as the model predictions are correct. The beauty of tractable mathematical modeling of human utility came at the cost of in- creasingly accepting a potentially oversimplified model of human behavior, whose underlying assumptions were no longer questioned within the profession. Some decades ago, however, the as-if modelling approach as well as the then widely accepted model of human behavior came under scrutiny from a handful of researchers, most prominently Amos Tversky, Daniel Kahneman, Richard Thaler and George Akerlof, who became increasingly dissatisfied with this reduced ap- proach to modeling human behavior.