COURSE 1: FUNDAMENTALS AND HIGHLIGHTS OF PERSONNEL ECONOMICS

This is the course I teach (with some variations from year to year) at UCSB. It develops a simple theoretical framework for thinking about firm-worker interactions –the principal-agent model—and uses it to organize a large empirical literature on personnel motivation and selection. The relevant sections of the book and lecture notes are:

Chapters 1-6 (the principal-agent problem): These chapters introduce and solve a simple version of the principal-agent problem, establishing the maximization and graphical tools that are used in the theoretical parts of the book. Applications include the franchise solution (when and how do workers pay for jobs?), risk sharing, multi-task agency problems, and non-linear contracts. Empirical examples include sharecropping, cross-selling at Wells Fargo, and timing gaming among software salespeople.

Chapters 8 and 9, plus Sections 10.6 and 10.7 (evidence on employee motivation): These chapters cover a classic performance pay ‘success story’ (Safelite) plus some key behavioral determinants of labor supply, including intrinsic motivation, reference points, present bias, trust, and employee concerns with fairness. Before teaching Section 10.6 (“The Hidden Cost of Control”), I like to do Classroom Experiment 2.2 which illustrates Falk and Kosfeld’s (2006) experiment.

Chapters 13-15 or 17-18.2 (recruiting and wage-setting). Chapters in this Part can be taught in any order, depending on instructor and student interest. One way to narrow down the many options is to focus on the recruitment process (Chapters 13-15, or just 14-15), or on wage-setting (Chapters 17-18). Both have some engaging empirical applications, including Pallais and Sands’s (2016) study of employee referrals on ODesk; Hoffman, Kahn and Li’s (2015) study of managerial discretion in hiring; and Raff and Summers’ (1987) study of Ford’s five-dollar day.

Chapters 20-22.3 (tournaments). Chapter 20 establishes a basic formal model of tournaments using the tools acquired in Chapters 1-6. Sections 20.8 and 20.9 (tournaments with risk aversion and Knoeber’s (1989) case study of contract farming) provide a nice ‘success story’ for tournament-based pay that can be taught without these tools. In my opinion, the three case studies in Chapter 21 belong in almost any version of the course: each illustrates a key potential drawback of tournaments (sabotage, collusion and risk-taking) in an engaging empirical setting. Before teaching this Chapter, I like to do Classroom Experiment 4.1, which illustrates Carpenter et al.’s (2010) sabotage experiment. Sections 22.1-22.3 on uneven tournaments also work very well with all audiences. Section 22.4 is advanced material, and is probably better suited to Course 4 than to this one.

Chapters 24 and 25 plus Sections 26.2-26.4 (teams): Chapter 24 establishes a basic formal model of teams using the tools acquired in Chapters 1-6. Free-riding is defined, and its causes and contractual remedies are studied. In my opinion, the three empirical studies in Chapter 25 belong in almost any version of the course. They can be taught without Chapter 24’s theoretical material, and together they illustrate four key mechanisms that make teams function much better than a simple free-riding model predicts: punishment, peer pressure, mutual monitoring, and helping/training behavior. Before teaching this Chapter, I like to do Classroom Experiment 5.1, which illustrates the linear public goods game that is the baseline treatment in Fehr and Gachter’s (2002) “Altruistic Punishment” paper. Much of Chapters 26 and 27 is advanced material, but the following Sections make some key and appealing points:

-the ‘corporate turnaround game’ application of weakest-link production in Section 26.2

-Section 26.3 on the advantages of asymmetric incentives (this is about using incentives to overcome team co-ordination problems by creating ‘leaders’)

- Section 26.4’s analysis of “Effort Choices under Perfect Substitutability: “Don’t Worry—Jane’ll Handle it!” in works well with all groups and is really fun. Students learn the volunteer’s dilemma game and use it to study gender differentials in behavior on teams.