Rationality and Competition: The Economic Performance of Individuals and Firms
||DFG Collaborative Research Center / Sonderforschungsbereich-Transregio
||Rajshi Jayaraman (ESMT Berlin), Marrit Teirlinck (ESMT Berlin)
||Ludwig-Maximilians-Universität München (project lead), Humboldt University Berlin, Deutsches Institut für Wirtschaft, ifo Institut – Leibniz-Institut für Wirtschaftsforschung an der Universität München e.V, Max Planck Intitute for Innovation and Competition, Technical University Berlin, Wissenschaftszentrum Berlin
||Incentive design in the presence of social preferences
The Collaborative Research Center Transregio “Rationality and Competition” combines the research programs of behavioral and neoclassical economists to study applied economic questions that are of high policy relevance. The focus CRC TRR 190 is on the economic behavior and performance of individuals and firms: How do systematic biases in expectations, decision processes, and preferences affect the most important economic decisions of households – about education, health, labor supply, financial investments and the purchase of durable consumption goods? How do firms respond to behavioral biases of their customers and their employees, for example by adjusting their marketing strategies, their organizational design, their incentive schemes and their innovation activities? Does competition reduce or amplify the effects of behavioral biases of individuals and firms? What economic policy interventions are effective to protect consumers and employees from exploitation and how can they prevent the destabilization of markets (due to bubbles and crashes)? Thus, the CRC “Rationality and Competition” will analyze the allocative consequences and the economic policy implications of different aspects of rationality and deviations from rationality in competitive environments.
An important empirical question is in what environments behavioral biases have a quantitatively large effect and under what circumstances the standard, neoclassical model is sufficient to explain observed behavior. Answering this question requires the close collaboration of behavioral and neoclassical economists that the CRC is set up to promote. We will employ modern microeconomic theory (including behavioral economic theory) to generate testable hypotheses as well as a wide set of empirical methods using field data, survey data, administrative data and economic experiments.
The project by Englmaier and Jayaraman focuses on the human resource management practices in firms. A firm’s ability to compete effectively on product markets depends crucially on its success in attracting, retaining, and motivating productive workers in competitive labor markets. Standard economic models focus on the design of incentive mechanisms that are based on monetary rewards. While these are clearly important, the standard model has, until relatively recently, failed to incorporate the presence of social preferences of workers, including fairness, reciprocity, identity and peer effects in the workplace. The project will examine the effects of diverse human resource management (HRM) practices - such as incentive pay, screening for traits, or team based work organization - on worker productivity, and thereby firm competitiveness, while accounting for the possibility that workers are motivated not only by financial considerations but also by social preferences.
More information is available on the official website of the Collaborative Research Center
The visiting research stay by Meghan Busse (Kellogg School of Management, Northwestern University) and Florian Zettelmeyer (Kellogg School of Management, Northwestern University) is sponsored by the CRC TRR 190.