Knowledge that Transforms

Employee involvement (EI) programs are the leading-edge form of personnel and labor relations in the United States. While many managers believe that these programs raise productivity and profits, the statistical evidence that EI improves the performance of firms is equivocal. The coefficients on measures of EI in production functions are usually positive but often insignificant or small (Commission on the Future of Worker–Management Relations, 1994 Ch. 2; Peter Cappelli and David Neumark, 1999) or contingent on other factors (Sandra E. Black and Lisa M. Lynch, 1997; Casey Ichniowski et al., 1997). A detailed case study of EI has further confirmed these small effects that were found in large data sets (Kleiner et al., 1999). If EI programs do not greatly affect productivity, why does business think so highly of them? In this study, we argue that the main beneficiaries of EI are workers and managers. We estimate the effects of EI on productivity using panel data on firms and the effects of EI on workers using a survey of employees and find that EI barely affects firm productivity but substantially improves worker well-being. We offer two explanations for this result.

We develop a competitive model of trade between countries with similar aggregate factor endowments. The trade pattern reflects differences in the distribution of talent across the labor forces of the two countries. The country with a relatively homogeneous population exports the good produced by a technology with complementarities between tasks. The country with a more diverse workforce exports the good for which individual success is more important. Imperfect observability of talent strengthens the forces of comparative advantage. Finally, we examine the effects of trade on income distribution and the composition of firms in each industry.

The Phillips Curve, the Persistence of Inflation, and the Lucas Critique: Evidence from Exchange-Rate Regimes: Comment by Clemens J. M. Kool and Alex Lammertsma. Published in volume 90, issue 1, pages 312-315 of American Economic Review, March 2000

Two previous surveys used to measure the welfare implications of Christmas gift-giving in the United States have reached opposite conclusions. Joel Waldfogel (1993) finds a welfare reduction of 13 percent or more associated with Christmas giving. Curiously, Sara J. Solnick and David Hemenway’s (1996) (henceforth, SH) replication of Waldfogel’s survey turns up just the opposite result: a 214-percent welfare gain. We design a series of controlled laboratory experiments to determine why the two papers arrive at opposite conclusions. We do not produce our own estimate of the deadweight loss of gift-giving; rather, our aim is to understand how, and which among, the differences in methodology between the two studies account for their divergent findings. Waldfogel (1993) surveyed 58 students enrolled in an intermediate microeconomics class about specific gifts they had received for Christmas. He asked recipients to estimate the amount paid by the giver for each gift received. Recipients were then asked to place a value on each gift they received. Respondents were instructed to estimate the value of a gift as the “...amount of cash such that you are indifferent between the gift and the cash, not counting the sentimental value of the gift” (p. 1331). Waldfogel measures the welfare yield of a gift as the difference between the recipient’s valuation and her cost estimate of the gift. Based on 278 gifts reported, Waldfogel finds that gifts have an average yield of 87.1 percent, indicating that gifts lose about 13 percent of their value in the exchange from giver to receiver. When cash gifts are excluded, the average yield falls further to 83.9 percent. SH were intrigued enough by Waldfogel’s results to replicate his study. Contrary to Waldfogel, SH find that gift-giving is actually welfare improving with an average yield of 214 percent (median yield 111 percent). They claim that a broader subject pool than that questioned by Waldfogel explains the reversal. Concerned that undergraduates in an intermediate microeconomics class may be unrepresentative, SH administered their survey to members of the general public at train stations and airports and to staff and graduate students enrolled in a biostatistics or an economics class at the Harvard School of Public Health. They also altered the question used to elicit respondents’ valuations of gifts received. Their survey question reads as follows (p. 1300): “Aside from any sentimental value, if, without the giver ever knowing, you could receive an amount of money instead of the gift, what is the minimum amount of money that would make you equally happy?” The change in wording from “the amount of cash such that you are indifferent” to the “amount of money that would make you equally happy” was prompted by a concern that “indifference” is a technical word familiar only to economists. It remains to be seen whether SH’s “equally happy” question is substantially equivalent to the “indifference” version of the question or whether they have introduced a greater change than they realize. An additional methodological concern is that the cost estimates always precede respondents’ valuations in both studies. Order effects are well documented in the social psychology literature: cost estimates may influence valuations. In particular, costs may serve as a judgmental anchor upon which to base value estimates. Reversing the order of the questions is a technique common to survey and experimental methods in the social sciences to balance the researcher’s design and offset possible order effects. * Ruffle: Department of Economics, Ben Gurion University, P.O.B. 653, Beer Sheva, 84105, Israel (e-mail: [email protected]); Tykocinski: Department of Behavioral Sciences, Ben Gurion University, Beer Sheva, 84105, Israel (e-mail: [email protected]). We thank Tomer Bakalash for research assistance and Sara Solnick, Todd Kaplan, three anonymous referees of this journal, and seminar participants at Ben Gurion University, Universite Louis Pasteur, and the 1998 ESA meetings in Mannheim for comments. 1 Howard Schuman and Stanley Presser (1981) provide a good starting point in this literature.

Who sets CEO pay? Our standard answer to this question has been shaped by principal agent theory: shareholders set CEO pay. They use pay to limit the moral hazard problem caused by the low ownership stakes of CEOs. Through bonuses, options, or long term contracts, shareholders can motivate the CEO to maximize firm wealth. In other words, shareholders use pay to provide incentives, a view we refer to as the contracting view. An alternative view, championed by practitioners such as Crystal (1991), argues that CEOs set their own pay. They manipulate the compensation committee and hence the pay process itself to pay themselves what they can. The only constraints they face may be the availability of funds or more general fears, such as not wanting to be singled out in the Wall Street Journal as being overpaid. We refer to this second view as the skimming view. In this paper, we investigate the relevance of these two views.

We develop a two‐tiered agency model that shows how rent‐seeking behavior on the part of division managers can subvert the workings of an internal capital market. By rent‐seeking, division managers can raise their bargaining power and extract greater overall compensation from the CEO. And because the CEO is herself an agent of outside investors, this extra compensation may take the form not of cash wages, but rather of preferential capital budgeting allocations. One interesting feature of our model is that it implies a kind of “socialism” in internal capital allocation, whereby weaker divisions get subsidized by stronger ones.

We model the distortions that internal power struggles can generate in the allocation of resources between divisions of a diversified firm. The model predicts that if divisions are similar in the level of their resources and opportunities, funds will be transferred from divisions with poor opportunities to divisions with good opportunities. When diversity in resources and opportunities increases, however, resources can flow toward the most inefficient division, leading to more inefficient investment and less valuable firms. We test these predictions on a panel of diversified U.S. firms during the period from 1980 to 1993 and find evidence consistent with them.

This paper explores the structural differences and relative goodness‐of‐fits of affine term structure models (ATSMs). Within the family of ATSMs there is a trade‐off between flexibility in modeling the conditional correlations and volatilities of the risk factors. This trade‐off is formalized by our classification of N ‐factor affine family into non‐nested subfamilies of models. Specializing to three‐factor ATSMs, our analysis suggests, based on theoretical considerations and empirical evidence, that some subfamilies of ATSMs are better suited than others to explaining historical interest rate behavior.

We use a new database to perform a comprehensive analysis of the mutual fund industry. We find that funds hold stocks that outperform the market by 1.3 percent per year, but their net returns underperform by one percent. Of the 2.3 percent difference between these results, 0.7 percent is due to the underperformance of nonstock holdings, whereas 1.6 percent is due to expenses and transactions costs. Thus, funds pick stocks well enough to cover their costs. Also, high‐turnover funds beat the Vanguard Index 500 fund on a net return basis. Our evidence supports the value of active mutual fund management.

We propose a cross‐sectional time‐series model to assess the impact of market liberalizations in emerging equity markets on the cost of capital, volatility, beta, and correlation with world market returns. Liberalizations are defined by regulatory changes, the introduction of depositary receipts and country funds, and structural breaks in equity capital flows to the emerging markets. We control for other economic events that might confound the impact of foreign speculators on local equity markets. Across a range of specifications, the cost of capital always decreases after a capital market liberalization with the effect varying between 5 and 75 basis points.