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TOPIC 6: LABOR RELATIONS AND TEAMS.
1- Example:
Public good contribution game:
• Form you into groups of 3.
• Each group member gets 10€
• Each person devides the amount X out of 10 to put in a “magic pot”.
• All the money pot is doubled, divided equally and returned to the group.
• What level of X would you choose to maximize your profit? – I’d put 0 Euros,
to get money for free (10+the equally distribution within the group.
• What level of X would be the best for the group? – 10, it would double the all
amount.
2- What is a team?
People (with the same objective) gathered together to achieve a specific group objective. Alone you would produce less. There is complementarity between the effort and skill of each member. There are complementary skills, combining skills to perform together.
2-..a The effort/skill of one person is more valuable when combined with the
effort/skill of another.
2-..b This means that working together produces a higher product than the sum
of the product of people working as individuals.
Theory and data researchers
• Love of Lesbian
• Barça
• Business Economics students
Is not a team the attendees of Love of Lesbian concert.
GOOD TEAMS AND BAD TEAMS: Casual observation reveals that some groups work well and other don’t:
• Good teams: Linux and Android developers
• Bad teams: US Mineral Management Service, France at 2010 World Cup
What makes a good team and bad team? –Depends on the key problems!!
3- Problems of teams
3-..1 Moral hazard revisited (opportunistic behavior)
Here we have another problem of workers taking opportunistic actions. How did we solve the moral hazard problem before? – By individual performance pay. Key question is why can’t we use the normal solutions in the team context. That’s because before there was an individual action that made a result and for that we maid a payment. Now we have team actions that produce only one result for all!! The fact that team output depends on the inputs of all members means that measuring individual output is hard:
Example: What percentage of Barça’s Champions League victories are attributable to Messi, Xavi, and Iniesta individually? INDIVIDUAL ACTION F 0 E 01 ONLY RESULT F 0 E 0PAYMENT SEVERAL INDIVIDUAL ACTIONS (from one team) F 0 E 01 ONLY RESULT F 0 E 0What to do?
• One option is to base individual pay on the team’s performance F 0 E 0but this creates a
specific problem.
Xavi’s action + Messi’s action +… F 0 E 01 ONLY RESULT F 0 E 0Xavi’s payment + Messi’s Payment +…
Basing individual pay on team performance generates a specific type of externality: In economics an externality is a positive or negative effect than an individual’s actions have on the well-being of others. It can be:
• Negative Externality: Smoking
• Positive Externality: Vaccinations
Free-riding: When an individual puts more effort into improving the team’s output he increases his own payoff, but he also increases the payoff of others. If he does not care about others’ payoffs, he will put in too little effort, this is called “ free-riding ”
• When positive externalities exist, other people work hard. I get something for
nothing.
• Suppose 1 and 2 are working in a team with team pay.
• Suppose 1 behaves better F 0 E 0teams per performance ( F 0 E 1pay for 1; F 0 E 1pay for 2)
• Behaving better is costly.
The problem comes when everybody behaves the same way:
• When everybody puts in low effort, the total outcome is worse for everybody.
• Example of tension between what’s best for individuals and what’s best for
groups.
• Suppose I had put you into groups of three to make your presentations.
• What happens when there is one motivated person and two lazy people? – all
group will be better off. Lazy ones will work harder and they also get more for less.
• How can I ever tell the difference?
The solution on which we will focus is, as before, investing resources into monitoring, measuring, and controlling individual performance.
• But the new question is: which kind of organization monitors most efficiently?
• Different kinds of organizational solutions
4- Organizational solutions/Possibilities for control
1. No control
2. Non-specialized control
• the group monitors itself
3. Specialized control
• a person outside the group monitors the group
(Depending on the situation, any of these strategies might be appropriate)
• Group size
• Difficulty to monitor performance
• Technology
• Cost in terms of time and effort
• Preferences of group members
• Repetition of interaction
• Difficulty to kick people out of group
.1 NO CONTROL
One possibility is to not monitor or reward performance at all. Note that this even rules out group pay
.3 SPECIALIZED CONTROL
The specialized monitor’s job is to observe and evaluate individuals’ performance and then reward them according to their contribution to the team. These rewards can come through explicit pay or through promotions.
Example: Barça has a specialized monitor: his name is Tito Vilanova. You and I only observe whether Barça wins or not, but Tito directly observes the actions that each player takes. He can use that information to control players’ behavior.
- Behavior control : one of One of Pep Guardiola’s first actions on becoming coach was to fine players for being even a few minutes late to practice. (only could do it him). He also had a powerful way of enforcing good behavior: he controlled who plays and who does not play, and who even stayed playing.
5- Modern firms
Most modern large organizations have specialized monitors: these are managers. In fact this is another theory of the firm: teams are more productive than individuals, but to thrive they require people to devote resources to monitoring.
They all work together to produce something. A team of workers can act by moral hazard, so we solve the problem hiring a manager (specialized monitor) but he may act opportunisticly, how can we monitor our manager??
Important question: where do the monitors get incentives to monitor?
6- Efficient monitoring
Increased monitoring will improve the profits of the team but will also incur costs. We want monitoring to occur up until the point that the marginal revenue of increased team production equal the marginal cost of the resources spent on monitoring. How can we make sure the monitor invests just the efficient level of resources?
The residual claimant: “What’s left over” “person in the organization who gets all benefits after costs”:
• Suppose that the monitor must pay for all costs himself but gets to keep the output
of the team that he monitors. This makes him the “ residual claimant ”: he keeps what is left over after all wages, overhead costs, etc. have been spent. If the monitor is a residual claimant then he has efficient incentives to invest.
Let M be the amount of monitoring Let π(M) be the profits of team production from amount M of monitoring Let c(M) be the cost of monitoring If the monitor is a residual claimant then his payoff is π(M) - c(M) What level of M will he choose? π' (M) = c' (M) F 0 E 0marginal benefit equals marginal cost
7- Capitalist firms
The message here is that an optimal organization can feature a team of people involved in production overseen by a monitor that is a residual claimant. But this is exactly what
a capitalist firm is: ownership makes one a residual claimant. Ultimately the owner pays all the costs of running the firm but takes all the profit.
• Problem: This story works as long as the owner is just one person, but in corporation
this is not true So we get another team problem!
• Next term you will think more about corporate governance. Here I just want you to
know that separating ownership from production can be efficient
• More shareholders F 0 E 0we need to hire more monitors.
Practice question: Suppose Rosa and Modest are working on a farm picking fruit. There are two incentive schemes available to the farm manager: (1) pay Rosa €0.10 for each fruit she picks and Modest €0.10 for each fruit he picks Here when rosa picks another fruit she gets 0.10€ (2) pay €0.10 (split evenly between Rosa and Modest) per fruit picked by either person. Here if Rosa picks another fruit she gets 0.05€ -Free riding can exist.
To earn any fixed amount of money, Rosa must work twice harder in 1 than in 2. The total amount of fruit picked under scheme (1) will probably be higher than under scheme (2). True or False?
Earn 1.000 picking fruit
Benefits Costs Surplus B C2=2C1 B-2C B-C
Don’t pick fruit 0 0 0-
Rosa will work if B-C >= 0 But never
