Journal of

Economic
Perspectives-Volume
21,
Number 4-Fall
2007-Pages
135-149
Paying Respect
Tore
Ellingsen
and
Magnus Johannesson
Why
do
people
work? Economic
theory generally,
and the
principal-
agent
model
specifically, emphasize
the role of material incentives. The
standard
assumption
is that
people
work hard
only
if
they
receive
monetary compensation
for
doing
so.
However,
a substantial
body
of evidence
contradicts the standard economic model.
Many
salaried
academics,
for
example,
work
diligently year
after
year, continuing
to exert themselves as
they approach
retirement,
although
financial incentives are then
usually
absent.
We will
argue
that while economists have been
right
to focus on
incentives,
they
have been
wrong
to focus so
exclusively
on material incentives. While workers
appreciate monetary
rewards,
they
also
get utility
from what
(they
believe
that)
others think about them.
Thus,
employers
can
pay
their workers with a combina-
tion of
monetary
rewards and
respect. Employers
can
help
to fulfill
employees'
desire for
respect
in at least four
ways,
each of which sheds some
light
on observed
practices:
First,
attention from an
employer
can enhance the
employee's
sense of
being respected
for
good performance.
Second,
a
manager
or the
employer
can
increase the value of
respect by proving
to be a
worthy
audience;
for
example,
hard-working employees appreciate
the
respect
of
hard-working managers,
and
idealistic workers
appreciate
the
respect
of an idealistic
employer.
Third,
the
employer
can influence the norms of
respectability-that
is,
what traits
gain respect
in a certain
workplace.
Fourth,
employers
can affect what information about an
m Tore
Ellingsen
is the
Ragnar
S6derberg
Professor of
Economics and
Magnus Johannesson
is
Professor of
Economics,
both at the Stockholm School
of
Economics, Stockholm,
Sweden.
Their e-mail addresses are
(tore.ellingsen
@hhs.se)
and
(magnus.johannesson @hhs.se),
respectively.
136
Journal of
Economic
Perspectives
employee
is available to
others,
and
therefore,
the
respect
or esteem that the
employee
receives from others.
We
begin by laying
out a
body
of evidence
that,
taken as a
whole,
makes a
strong
case that
respect
matters in the
workplace,
above and
beyond
material
rewards. We discuss evidence that workers
respond
to
attention,
symbolic
rewards,
and trust-and even that material incentives in some cases lead to less effort.
Building
on our theoretical work in
Ellingsen
and
Johannesson (forthcoming),
we
then
argue
that
many
of these observations can be
captured
in a standard
princi-
pal-agent
model,
once the
principals
and the
agents
are assumed to care about
respect
or esteem as well as
money.
Our
approach
is an
example
of behavioral
agency theory,
which includes two
main lines of research. The social
preference approach
studies the
impact
on contracts
of
other-regarding
motives such as
altruism,
competitiveness, reciprocity,
or fair-
ness
(Akerlof, 1982;
Rotemberg,
1994;
Auriol and
Renault, 2001;
Englmaier
and
Wambach, 2005; Fehr, Klein,
and
Schmidt, 2007).
The social esteem
approach
focuses instead on the effects of
self-regarding
motives such as
pride
and shame.
The two
approaches overlap
to some
extent,
because altruism and fairness are
praiseworthy
and selfishness is
shameful,
but in this
paper
we focus more on social
esteem than on social
preferences.
Of
course,
the basic
insight
that workers care
about
receiving respect
from others is an old
one,
and not
only
in
psychology;
for
references to the economics and
philosophy
literatures on
esteem,
see
Frey
(1997)
and
especially
Brennan and Pettit
(2004).' However,
the task is
just getting
under-
way
of
modeling systematically
how
respect
is
paid by employers,
how it is received
by employees,
how it
complements monetary payments,
and how these interactions
manifest themselves in labor markets.
Evidence that
Respect
Matters in the
Workplace
A
variety
of worker
surveys suggest
that workers want more than
just monetary
compensation,
and in
particular
that
they
want a sort of
appreciation
and
recog-
nition from their
employers
that
conveys "respect."
For
example,
"full
appreciation
for work done" is the
only job
reward factor that
consistently
ranks
among
the
top
two motivators for U.S. workers
throughout
the
post-World
War
II
period (Wiley,
1997). Among
ten
factors,
interesting
work was considered somewhat more
impor-
tant in the 1980s, and
good wages
were at the
top
of the list in the 1990s, but neither
'1 It is
likely
that a human desire for social esteem-that
is,
to feel
proud
and to avoid shame in the
context of broader
society-evolved
millennia
ago, presumably
because
approval
has been associated
with material and sexual benefits. For
anthropological
evidence,
see Fessler
(2004)
and the references
therein. For some formal
evolutionary arguments,
see Fershtman and Weiss
(1998a,b). However,
the
consequences
of social esteem
preferences
can be studied without a
theory
of their
origin. Throughout,
we therefore leave
open
the issue of
why people
want to make a favorable
impression.
Tore
Ellingsen
and
Magnus Johannesson
137
interesting
work nor
good wages
were
among
the
top
four reward factors in more
than one decade out of three.
Likewise,
Elsdon
(2002)
reports
that lack of
recog-
nition or
appreciation
is a
major
reason
why people
leave
organizations,
second
only
to lack of career
development opportunities.
Financial motives
occupy
fourth
place.
In this
section,
we describe evidence that
employees
value and
respond posi-
tively
to
signs
of
respect,
such as
symbolic
awards, attention,
and trust.
Conversely,
workers sometimes
respond negatively
to what
they perceive
as
signs
of disre-
spect, including
intrusive
managerial
control and
even,
in some
cases,
monetary
incentives.
Symbolic
Rewards
Popular management
books revel in
symbolic
awards.
Examples
include Bob
Nelson's
(1994)
1001
Ways
to
Reward
Employees,
Dianna Podmoroff's
(2005)
365
Ways
to
Reward
and Motivate Your
Employees Every Day:
With Little or No
Money,
and
Cindy
Ventrice's
(2003)
Make Their
Day! Employee Recognition
that Works. The
huge
market for these books and their authors'
speeches
and
consultancy
services
strongly suggest
that the economic
theory
of motivation is
incomplete.
Increasingly,
the
messages
of these
popular management
books are backed
up
by systematic
evidence.
Many
field
experiments
have
investigated
the extent to
which attention can be
reliably
used as a reward.
Markham, Scott,
and McKee
(2002)
provide
an
apt
illustration. Over a
year, studying
1100 workers in four
cut-and-sew
garment
factories in the mid-Atlantic
area,
the authors
compare
the
effect of a
public recognition program
with three
types
of controls.
Inspired by
the
advice of
practitioners,
detailed in the rich if nonacademic
management
literature,
the researchers
developed
a
public recognition program
with three main
ingredi-
ents:
personal
attention,
public
celebration,
and mementos. All
employees
with
perfect
attendance
during
an entire month had their names
posted
with a
gold
star
for that
month,
and
employees
with no more than two absences
during
a
quarter
received a
personal
card
notifying
and
congratulating
them. At the end of the
year,
a
public plant-wide meeting recognized good
and
perfect
attendance.
Employees
with a
perfect
attendance record received
engraved gold
necklaces
(females)
and
penknives (males),
whereas
employees
with a
good
attendance record received
similar mementos in silver. The
program
reduced absenteeism
by
about 40
percent
and was
popular
with the workers. The three control treatments
produced only
insignificant changes
in absenteeism.
The
analysis
of such behavioral
management
interventions has been a
lively
area of
management
science for more than two decades.
By now, more than 100
separate
scientific studies have considered rewards of
money, feedback, and social
recognition. Although many
studies consider
only
one reinforcer, and social rec-
ognition
is less
frequently
studied than
money
and
feedback, a
survey
of 72
behavioral
management
studies
by Stajkovic
and Luthans
(2003) concludes that
138
Journal of
Economic
Perspectives
social
recognition
has a
positive
effect on behavior both alone and in combination
with other reinforcers.
Borrowing
a term from cultural
anthropology,
the
company
can
hypercognize
certain worker traits-that
is,
it can determine to some extent what traits are
highly
recognized
within this
organization-and thereby shape
the
organizational
culture.
When the
company gives prizes
for
attendance,
as in the
study by
Markham, Scott,
and McKee
(2002),
it is
utilizing
its
power
to define the sources of esteem.2
For most
workers,
bonuses and stock
ownership plans yield very
little economic
return to their own
effort,
and are thus
primarily symbolic
(Baron
and
Kreps,
1999,
p.
264). However,
by rewarding group
effort rather than individual
effort,
the
company conveys
the
message
that
cooperation
is esteemed more
highly
than
competition.
Indeed,
we believe that if such weak incentives were awarded on an
individual
basis,
they
would be
interpreted
as
disrespectful
and could even backfire.
Individual material incentives
only
work well if
they
are
sufficiently strong
or if the
employer
can use other means to counteract the
impression
of
disrespect;
other-
wise,
symbolic
rewards can be
preferable.
Attention
Some of the earliest work on human relations in the
workplace
started out to
examine how
physical
work conditions affected
employees,
but ended
up studying
the
relationship
between workers'
productivity
and the amount of attention
being
paid
to them. The so-called Hawthorne
experiments
were carried out between 1924
and 1932 at the Hawthorne
Works,
a
plant
of the Western Electric
Company
near
Chicago,
Illinois. The
experiments initially
set out to
investigate
the effect of
working
conditions-such as
lighting-on productivity. Surprisingly,
both more
and less
light appeared
to cause
higher
worker effort. When workers were inter-
viewed about their
motives,
a common
response
was that
they
were
pleased
to
receive so much attention and therefore tried to do their best. The classic
descrip-
tions and
interpretations
of the Hawthorne
experiments
are
Roethliesberger
and
Dickson
(1939)
and
Mayo
(1945);
for a
compact
account,
see Scott
(2003,
pages
61-62). According
to
Scott, "[I]t
is
only
a
slight exaggeration
to
suggest
that the
academic field of industrial
sociology
first saw the
light
of
day
at the Hawthorne
plant."
The Hawthorne
experiments
themselves have been controversial
(Jones,
1992),
and
subsequent empirical
studies
attempting
to
identify
Hawthorne effects
in the field have reached mixed results.
Perhaps
it is
just
too difficult to
separate
the
2 Some writers suggest that economic theories themselves are
part
of
society's
culture and therefore
affect behavior.
According
to Pfeffer
(1994, chap.
4)
and Ghoshal
(2005),
economics affects the values
and
expectations
of
managers,
and
managers' expectations
tend to
be self-fulfilling.
If
employers
treat
employees
as
unscrupulous opportunists, opportunism
flourishes. And if
business
school teachers
assume that there is a conflict of interest
between
owners and
managers,
then MBA-trained
managers
become
more
prone
to
pursuing
their own
goals.
If
so,
there is all the more reason to consider
carefully
the
assumptions
of
principal-agent theory.
Paying Respect
139
pure
effect of increased
employer
attention to workers from the
promise
of a
reward or the threat of
punishment.
If workers think that
they
are
being
monitored
more
closely
because the
employer
is
looking
for
ways
to reduce worker
rents,
increased
monitoring may
even have
negative
effects
(Enzle
and
Anderson, 1993).
Evidence from a
variety
of
laboratory
and field
experiments settings
in both
psychology
and economics can also be informative about the basic
psychological
mechanisms.
However,
this evidence can
only
be
extrapolated
to the
workplace
with caution.
Many
studies
attempt
to isolate a
pure
effect of observation on
behavior in a context without
monetary
rewards,
which is
obviously
different than
a
workplace
that offers a combination of the two.
Also,
the observation that occurs
in these studies is often
by
a
party
who is more of a
peer
than an
authority figure,
and
many people
react
differently
to
peers
than to authorities.
With those caveats in
mind,
we note that
Zajonc
(1965)
is
prominent
in the
psychological
literature for
arguing
that
being
observed affects
performance.
Zajonc
offers evidence that the
presence
of others has a beneficial effect in the case
of well-learned
tasks,
but a detrimental effect in the case of novel tasks. Since the
former case is
probably
the most relevant for the
workplace setting,
this evidence
is
congruent
with our
argument. Relatedly,
Wicklund and Duval
(1971)
argue
that
the
presence
of
spectators
increases the
performer's
awareness of the
gap
between
attained
performance
and ideal
performance, producing
an
unpleasant feeling.
The
performer
exerts effort in order to reduce the
unpleasantness.
We refer to
Seta and Seta
(1995)
for a more extensive discussion of the sizeable
subsequent
literature.
Economic
laboratory experiments
offer some
insights
into the effects of
being
observed,
too. Falk and Ichino
(2006)
study experimentally
the behavior of Ger-
man
high
school students
conducting
a
simple
task without a
monetary
incentive.
They
find that
especially
the worst
performers
work harder in the
presence
of
others than
by
themselves. In the dictator
game,
one
subject
(the dictator)
decides
how to share a sum of
money
with another
subject
(the
recipient).
The dictator is
free to choose
any
division. A dictator who is less
anonymous-that
is,
more
observed-tends to
give
more
(Hoffman, McCabe, Shachat,
and
Smith, 1994).
In
field studies of charitable
donations,
increased
publicity
also causes
higher
dona-
tions
(Harbaugh
1998; Soetevent,
2005).3
While these
findings represent
evidence of
positive
audience
effects,
they
do
not
prove
that
people consciously
seek
respect
or esteem.
Indeed,
some of the
sensitivity
to attention
appears
to be instinctive.
Haley
and Fessler
(2005)
document
3 Social esteem effects seem to be at work even under conditions of
great anonymity, perhaps
not even
requiring
that the actor and the audience are
present
at the same time. One obvious
example
is that
many people
leave a
tip
at restaurants in a
foreign place, although they
will never visit the
place again,
and
nobody
has
recognized
them.
Many people
care about the
judgment
of
others,
even when
they
are
completely anonymous.
For an
intriguing piece
of
experimental
evidence,
see
Dana, Cain,
and Dawes
(2006).
140
Journal of
Economic
Perspectives
that a set of
painted eyes
induces more
generous
behavior in a dictator
game
experiment.
Bateson, Nettle,
and Roberts
(2006)
similarly
document
that,
compared
to a control
image,
an
image
of a
pair
of
eyes
almost
tripled
the
contributions to an
honesty
box used to collect
money
for drinks in a
university
coffee room.
Trust
The literature on human relations has
long suggested
that
leadership style
can
be
important.
A series of
empirical
studies
reported by Stogdill
and Coons
(1957)
found that
high
levels of
supervisor
trust,
friendship,
and
respect
were associated
with better
performance,
at least if combined with
organizational
skills. Later
research failed to confirm the
optimistic conjecture
that a trustful
supervisory style
is
generally
more
profitable
than a more
controlling style
(Hollander
and
Julian,
1969). However,
from the
point
of view of conventional
agency theory,
it is
problematic why
trust should ever induce trustworthiness.4
The
management
literature is
replete
with stories in which trust has been
beneficial. We have been
impressed
with the case of Svenska
Handelsbanken,
one
of Sweden's
largest
banks,
under the
leadership
of
Jan
Wallander. In
1970,
soon
after
taking
over as chief executive
officer,
Wallander abandoned bank
budgeting
altogether
and
delegated
most
lending
decisions all the
way
down to the
personnel
at each local
office,
arguing
that trust
promotes
initiative and trustworthiness. The
strategy helped
turn around the troubled bank. Since
then,
the bank has remained
highly profitable.
For an
autobiographical
account,
see Wallander
(2003).
A more
frequently
cited
example
is David Packard's
(1995,
p.
135)
account of
how he became convinced that General Electric had made a mistake in
distrusting
their
employees.
"GE was
especially
zealous about
guarding
its tool and
parts
bins
to make sure
employees
didn't steal
anything."
As a
result,
stealing
became almost
like a
sport.
When Packard started Hewlett and
Packard,
"[T]he
GE memories were
still
strong
and I determined that our
parts
bins and storerooms should
always
be
open."
Of
course,
trust will not
always
be rewarded. Some researchers
report
that a
reduction in
monitoring
induces some workers to shirk
more,
and that it increases
average shirking (Nagin,
Rebitzer, Sanders,
and
Taylor,
2002). However,
even in
this
work,
a
significant
fraction of the workers do not take
advantage
of the
increased incentive to cheat.
Thus,
the
key
issue with
trusting
behavior
by managers
is not whether the
manager's
trust is sometimes abused, but
whether the
benefits
of trust are
outweighed by
the costs.
Economic
experiments
have
helped
to document and
clarify
the
ways
in which
trust elicits
trustworthy
behavior.
Early laboratory experiments
considered behavior
4
According
to
incomplete
contract
models,
principals may delegate
their
power
as a commitment to
assure the
agent
of credible
protection against
future intervention
by
the
principal.
Such
delegation
is
not a
sign
that the
principal
trusts the
agent,
but a device to enable the
agent
to trust the
principal.
Tore
Ellingsen
and
Magnus Johannesson
141
in the so-called trust
game, originally
devised
by Berg,
Dickhaut,
and McCabe
(1995).
In this
two-player game,
the
players
start out with endowments
e1
and
e2
respectively. Player
1
then decides how much
money
x to transfer to
Player
2.
Player
2 receives
ax,
where the
parameter
a is set
by
the
experimenter
and is
typically
2 or
3.
Finally, Player
2 decides how much
money y
to transfer back. In the
end,
Player
1 thus
gets
a
payoff
of
e,
- x +
y
dollars,
whereas
Player
2
gets e2
+ ax -
y
dollars.
Note that x is a measure of
Player
1's
trust,
whereas
y
is a measure of
Player
2's
trustworthiness. The
original study
established a robust
positive
correlation be-
tween x and
y.
A number of studies elucidate the
underlying
mechanisms
by varying
the sets
of actions that are available to the
players. Comparing
two different choice sets for
Player
1, McCabe,
Rigdon,
and Smith
(2003)
find that
voluntary
trust induces
Player
2 to behave more
trustworthily
than
involuntary
trust. Fehr and Rockenback
(2003)
and Fehr and List
(2004)
conduct trust
game experiments
in which
Player
1 has a choice whether or not to
punish
an
opponent
who returns less than their
requested
back-transfer. Falk and Kosfeld
(2006)
devise a related
game
in which
Player
1
does not make
any
transfer at
all,
but can restrict the
options
of
Player
2.
All these
experiments
find that intentions
matter,
not
just
actions. When
Player
2
recognizes
that
Player
1
actively
chose to act in a
trusting
manner,
that act is
typically
rewarded.5
Possible
Negative
Effects of Incentives
In some
specific settings, monetary
incentives
actually
seem to
produce
a
negative
effect on the desired outcome. For
example,
Titmuss
(1970)
famously
argued
that the
supply
of human blood decreased in the United States in the 1960s
because altruistic blood donors resented the use of material
payments.
In a recent
field
experiment,
Mellstr6m and
Johannesson (forthcoming)
find that
prospective
female blood donors indeed
respond negatively
to a
monetary
incentive,
whereas
the behavior of
potential
male donors is
largely
unaffected.
Gneezy
and Rustichini
(2000b)
present experimental
evidence that a small
material incentive can induce less effort than no material incentive at all. In their
first
experiment,
a small
positive piece
rate for
problem solving
reduces the
number of solved
problems compared
to a
zero-pay
benchmark.
Likewise,
in their
second
experiment,
a small
positive piece
rate for
collecting money
to
charity
entails lower collection effort than does a
zero-pay
benchmark.
Gneezy
and Rus-
tichini
(2000a)
conduct a field
experiment
in which
daycare
centers
impose
a
monetary
fine on
parents
who collect their kids too late. The
imposition
of the
fine results in an immediate and
significant
increase in late
collection; apparently
when
parents
can
pay
to
pick
their children
up later, they
have less hesitation
about
doing
so.
5
Several other
experiments
document the effects of intentions. For
example,
Charness
(2004)
shows
that intentions matter in
gift exchange games.
142
Journal of
Economic
Perspectives
Finally, Lepper,
Green,
and Nisbett
(1973)
find in an
experiment,
that chil-
dren who have
previously
been rewarded for a task are less
willing
to conduct the
task later. This
finding
echoes a
previous experiment by
Deci
(1971),
who found
that
people's
desire to
carry
out a task diminishes if
they
have
previously
received
monetary
rewards for
it,
even if the reward was a
surprise
and did not constitute an
incentive. For a
survey
of the vast
subsequent
literature,
see
Deci, Koestner,
and
Ryan
(1999).
Extrapolating
this kind of evidence to a
typical workplace
must be done
with caution. But it does
suggest
that the
display
of certain desirable
traits,
such
as concern for other
people,
will not be
especially encouraged by monetary
payments.
Worthy Managers
and
Organizations
Employees
often value
nonmonetary
rewards,
but sometimes
they
are an
occasion for
mockery. Employees
value some kinds of
attention,
but not if that
attention is
perceived
as intrusive or
exploitive. Employees
value
trust,
but some will
take
advantage
of it.
Employees
value
monetary
rewards,
but in certain
settings
such
rewards can be
counterproductive.
One
key
determinant of whether
employer
actions are
interpreted
as
showing respect
or
disrespect
is the workers'
perception
of the character of their
employers.
Some workers
evidently
care
intensely
about the
public image
of their
top
managers
or their
organization.
In fall
2004,
the news media in Sweden
reported
that the chief executive officer of the Red Cross in
Sweden,
Christer
Zettergren,
had chosen a
Jaguar
as his
company
car. Neither
Zettergren
nor other
top
man-
agement
had
anticipated
that the brand of the car would be of
any
relevance to Red
Cross workers or their trade unions. The car cost less than
many
other cars that
would be viewed as
acceptable.
Yet the
uproar
was about the brand and not the cost.
The conflict ended
immediately
when
Zettergren changed
the car to a less
"fancy"
brand.
Many
Red Cross workers are
idealists,
and
part
of the value of
working
for Red
Cross is the satisfaction of an idealistic
image,
both in their own minds and in the
eyes
of others.
Indeed,
employees
in the
nonprofit
sector earn
substantially
less
than
they
would in a
comparable job
in a
for-profit company
(Frank, 2003).
From
this
perspective, Zettergren's
behavior was
problematic
for two reasons.
First,
if
outsiders were to believe that
working
for Red Cross is like
any
other
job, fully
compatible
with a selfish and materialistic orientation, and
perhaps
even as well-
paid,
Red Cross workers would lose social esteem. Second, for some workers, when
top managers
are
unwilling
to make
personal
sacrifices this
suggests
that such
managers
will not
truly appreciate
the sacrifices that subordinates make. Presum-
ably,
one of the reasons for
nonprofit incorporation
is to send a clear
signal
that
principals
are
willing
to
forgo
economic
surpluses.
Paying Respect
143
Behavioral
Agency Theory
The standard economic
explanation
for the above
findings
would
typically go
something
like this: Workers care what
employers
believe about
them,
because
these beliefs translate into
wage
raises and
promotions
(Holmstr6m, 1982).
The
symbolic
awards are
only messages
about which behaviors will
yield
material ben-
efits in the future. While these
explanations
are
partially
true,
the
practitioners'
own
interpretations,
as evidenced in the
popular management
books,
are different.
Moreover,
the standard model fails to
explain
the evidence that trust sometimes
induces
trustworthiness;
this failure is
especially
clear in the controlled
game
experiments.
Behavioral
agency theory
introduces a richer set of motivations into the
principal-agent
model. Researchers reexamine
existing principal-agent
models,
but
apply
different
utility
functions. In
doing
so,
theorists
usually
also relax the
common
assumption
that all
people
have similar
preferences.
Much of the models'
power
is caused
by heterogeneity;
indeed,
many
of the results hold even if a
majority
of
people
have
completely
standard
(purely
selfish and
materialistic)
preferences.
Modeling Respect
The "social
preference" approach
introduces concerns for others into the
utility
function. The "social esteem"
approach,
which we
pursue
here,
introduces
instead
(or
in
addition)
a concern for what others think.6 To understand the social
esteem
approach,
consider the
following relationship
between a
single employer
and a
single employee.
The
employer
knows that the
employee
is
inherently
either
mediocre or talented. The
employee
wants the
employer
to believe that he is
talented. Since inherent traits are
unobservable,
the
employer
has to infer the
employee's type
from the
employee's
effort
(or
from some factor correlated with
effort).
Compared
to the case in which the
employer already
knows the
employee's
talent,
it can be shown that talented
employees
will tend to work harder for an
uninformed
employer.
The intuition behind this result is that the
fully
informed
employer's
esteem for the
employee
is
independent
of
effort,
whereas the unin-
formed
employer
will
only
believe that the
employee
is talented if the effort is
sufficiently great.
(Otherwise,
if the
employee
is too
easily
convinced about the
employee's
talent,
even a mediocre
employee
would be
tempted
to exert effort in
order to earn
esteem.)
In this
precise sense, the uninformed
employer pays respect
in return for
high
effort.
The
example
makes clear
why respect
is not the same as
praise.
The
employer
can
praise
the
employee
without the
employee feeling respected. Only
if
praise
6
Seminal papers along these lines are Hollander
(1990)
and Kandel and Lazear
(1992). However,
these
papers emphasize
workers'
relationships
to each
other,
rather than their
relationship
to the
employer
or boss.
144
Journal of
Economic
Perspectives
credibly
reveals the
employer's
belief about the
employee's
talent does it
convey
respect. By implication, respect
cannot
easily
be traded in a market.
Instead,
a
satisfactory
formal
analysis
of
respect requires
a
signaling
model,
albeit one in
which
people
care about others' beliefs
directly,
not
merely
the material conse-
quences
of those beliefs.' As a
general proposition,
this was
pointed
out
(albeit
in
other
contexts)
more or less
simultaneously by
Bernheim
(1994),
Glazer and
Konrad
(1996),
and Ireland
(1994).
Equipped
with such a
signaling
model,
it is
straightforward
to illustrate the above
example mathematically.8
With this
background,
it should be
apparent why employee
attention can have
a
positive
effect on
employee
effort.
Suppose
that the
employee's
effort
(or
a factor
correlated with
effort)
is
being
observed with
probability q.
If
q
is
zero,
effort is
incapable
of
affecting
social esteem. As
q
increases,
the effect of effort on the
employee's expected
esteem increases.
To create a role for
symbolic
rewards,
we
may
assume either that the
employ-
ee's
concern for social esteem is affected
by
such
symbols,
or that the
agent
has
many
different
characteristics,
each of which
may potentially
be
praiseworthy.
For
example,
both talent and
punctuality
are
praiseworthy,
but a
companywide
cam-
paign
for
punctuality
can make
respect
in this domain
relatively
more
important.
Modeling corporate
culture in this fashion would seem
largely
consistent with the
analysis
of Hofstede
(1980).
Extending
the model to account for the
positive
effects of trust is more
demanding.
In
Ellingsen
and
Johannesson (forthcoming),
we assume that both
principals
and
agents
differ in their
degree
of selfishness.
Moreover,
we make the
key assumption
that
everyone
dislikes
appearing
selfish in the
eyes
of
others,
especially if
these others are themselves not
selfish.
We are then able to
identify
situations
in which
only relatively
unselfish
principals
trust and
only relatively
unselfish
agents
behave in a
trustworthy
manner. In other
situations,
all
types
of
principals
trust,
while
only relatively
unselfish
agents
behave in a
trustworthy
manner.
Finally,
in
yet
other
situations,
no
type
of
principal
will trust.
The
logic
works
roughly
as follows. An
employer taking
an action that
appears
to be
selfish,
like intrusive
monitoring
of workers to
push
for
greater
effort,
7
Some economists are critical of
signaling
models,
because
they
are
frequently rejected by
the data. We
think that
signaling
models have too often been invoked in
settings
where
they
are
likely
to be
inappropriate,
such as financial markets. Since financial markets tend to
aggregate
information
quite
efficiently,
it is
unlikely
that
companies
should have to
engage
in
costly signaling
to
convey
their
information to the stock market. Our
setting
is
very
different,
in that there is no
aggregation
of
information,
and the actor cares about the
opinions
of
everyone
in the audience.
8 Let e denote
effort,
let
cle
denote a talented
employee's
effort
cost,
and let
c2e
denote a mediocre
employee's
effort cost. Let
p(e)
denote the
employee's
belief that the
employee
is talented-the
employer's respect
for the
employee. Finally,
let
rp
denote the
employee's "utility
of
respect." Suppose
there are no material rewards for effort. Under the
assumptions
that 0 <
c,
<
C2
and r >
0,
the
only
outcome to
satisfy
the so-called Intuitive Criterion is for a mediocre
agent
to exert no effort and for a
talented
agent
to exert effort
r/c2,
which
is the smallest effort level that the mediocre
agent
would not
want to mimic,
even in return for maximum
respect.
Tore
Ellingsen
and
Magnus Johannesson
145
undermines the workers' incentive to
signal
their own unselfishness. Since workers
care more about
being highly
esteemed
by
an unselfish
employer, they may
work
harder under weaker material incentives.
Generally,
when control mechanisms are
relatively
ineffective,
they
will have
only
a modest effect in
prodding
selfish workers
to exert somewhat
higher
effort,
and this
positive
effect is
outweighed by
the
reduction in effort
by
less selfish workers. As the control mechanisms become more
effective,
the benefit from
improved
control
eventually
dominates. At this
point,
all
employers
will benefit
materially
from
imposing
control.
However,
since
employers
also care about
esteem,
unselfish
employers
are still
willing
to
forgo
material
benefits in return for more esteem.9
Finally,
a
principal-agent
model
along
these lines allows
principals
to affect
the esteem that their
agents
achieve from others in
society.
These others
may
not
be able to observe the
agent's performance directly,
but
may
have access to a coarse
measure of the
agent's performance
if one is
provided by
the
principal.
In
corpo-
rations,
awards and titles
may partly
serve the function of
conferring
a coarse
signal
of the esteem that the
employee
is due.
Directions for Future Research
Having begun
to establish a formal
framework,
the next
step
is to
develop
further testable
implications.
Here are some that
spring
to mind:
First,
if
employers
can
pay
in
part
with
respect,
there should be observable
monetary
tradeoffs.
Employees
should be
willing
to take
jobs
with
high
social status
for less
monetary
reward than
they
would otherwise
require,
as
previously
noted
by
Fershtman and Weiss
(1993).
The
marginal
cost of
inducing
additional effort from
employees
motivated
by
social status is also lower. Some
employees
will care more
about
being paid respect
than others.
Presumably, equilibrium sorting
as well as
competition
between firms affect the eventual
outcome,
as indicated
by Besley
and
Ghatak
(2005)
in their
analysis
of mission-oriented firms and workers. Our
ap-
proach
is
complementary
to theirs as we offer a microfoundation for their
assump-
tion that mission-oriented
employees prefer
mission-oriented
employers.10
A second
possible
extension of our
analysis
is an
investigation
of the relation-
ship
between
performance
and the structure of
publicly
observable
nonmonetary
awards. An
analogy
to
grading
and educational
goals may
be
helpful
here." If the
9
Other related models that address the
puzzle
that
stronger
material incentives can induce less effort
include
B&nabou
and Tirole
(2003, 2006),
Fang
and Moscarini
(2005),
and Sliwka
(2007).
In the
psychology
literature,
Dickinson
(1989)
makes the related
point
that esteem considerations
might
explain
the
negative
effects of
past
rewards on future interest in a task.
10
Sorting
becomes
particularly important
if workers care about
local,
relative
respect;
see Frank
(1985)
and
Fershtman, Hvide,
and Weiss
(forthcoming).
"
To the best of our
knowledge
there is little
previous
theoretical work on
optimal grading
and
goal
setting.
The
goal-setting
literature is
largely empirical
and
traditionally
focuses on how to determine a
single goal (although possible
benefits of
multiple goal
levels have
occasionally
been
discussed;
Locke
and
Latham, 1990).
Within a formal
model, Costrell
(1994)
characterizes an
optimal
educational
standard under the
assumption
of a
binary (pass/fail) grading
scale. In a recent contribution more
146
Journal of
Economic
Perspectives
purpose
is to extract the maximum effort from a
particular
skill
group,
then the
best
grading
scheme
may
be a
pass/fail system
with the
requirements
for a
pass
set
at the
highest
effort level that
people
in this
group
are
willing
to exert. If the
principal
cares about the effort of all
types,
a finer
grading
scheme
may
be
optimal,
but the
optimal grading
scheme is
generically
coarser than the
underlying
distri-
bution of
types
(Zubrickas, 2007).
Similarly,
the
ways
for
employers
to show
respect
can focus on different
parts
of the workforce or on different skill
levels,
depending
on the
underlying
main
problems
of
production.
A third issue is that the
theory
so far focuses on
preferences
about what other
people
think. It seems
likely
that
people
also care about what other
people say.
Recent
experiments
isolate a
significant positive
effect of
anticipated
verbal reac-
tions on behavior in a dictator
game
(Xiao
and
Houser, 2007;
Ellingsen
and
Johannessen,
2007).
The
analogy
is that
anticipations
of
praise
or
disapproval by
the
employer
will affect
employee's
effort. A
seemingly straightforward way
to
include such concerns in the model is to let the concern for social esteem
depend
on features of the
feedback,
such as emotional
strength
and
proximity.
Final Remarks
Personnel economists have
usually sought
to
analyze
human resource man-
agement
under the maintained
assumption
that
employers
and
employees
hold
selfish and materialistic
preferences,
which
they
combine with
arguments
about
incentives and information
(as
discussed
by
Lazear and Shaw in this
issue).
In the
market for
ideas,
personnel
economics has been
doing
well,
but it is not a dominant
paradigm.
Business schools still
largely employ psychologists
and
sociologists
to
teach human resource
management.
Likewise,
economists are
conspicuously
ab-
sent as authors of
popular
books on workforce motivation. In
comparison
to the
commercial success of microeconomists in the fields of market
design,
antitrust,
and
corporate
finance,
personnel
economists are
lagging.
Like Baron and
Kreps
(1999),
we believe that the
segmentation
between
economic and
psychological analyses
of human resource
management
has been
detrimental.
By looking only
at one
aspect
of a
problem,
the
analysis
becomes
partial,
and omitted factors induce biased
interpretation
even of the factors under
consideration.
Moreover,
students
get
a
confusing picture
of the field when teach-
ers are
ignorant
of each others'
perspectives.
Behavioral
agency theory
seeks to
bridge
the
gap
between the economic and
psychological approaches
to human resource
management.
If
nothing else, we
closely
related to
ours,
Dubey
and
Geanakoplos
(2004)
characterize the
optimal grading
scale for
students who
compete
with each other and
primarily
care about relative
performance.
For an
empirical
study
of how
grading
standards affect
performance,
see
Figlio
and Lucas
(2004).
Paying Respect
147
hope
to have illustrated the
general point
that such
bridges
are desirable and
feasible. Our more
specific argument
is that economic
analysis
is
wrong
to insist
that all
people always
work for
money only.
While
the
simplification
is sometimes
innocuous,
at other times it
produces large discrepancies
between
theory
and
evidence. The alternative
assumption
that
respect
matters
too,
at least to some
people
in some
places
some of the
time,
helps
us account for several such
puzzles.
a
We thank Andrei
Shleiferfor
his
encouragement
and constructive
criticism,
James
Hines,
Jeremy
Stein,
and
Timothy Taylor for
their detailed comments and
suggestions,
and the
Torsten and
Ragnar Sdderberg
Foundation
(Ellingsen)
and the Swedish Research Council
(Johannesson)
for financial support.
Parts
of
the
paper
were
written
while
Ellingsen
visited
IIES
at Stockholm
University.
Their
hospitality
is
gratefully acknowledged.
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