I thought it was reasonably good session in class today, but I hurried a bit at the end. So here are a few things to consider that I didn't get too.
(1) One question is the frequency at which performance is measured. You might consider that from the point of view of how the blogging is graded in our course. An alternative to how we are doing that would be to have each post get a grade. Is that alternative better or worse? Can you explain why you feel that way?
(2) A second question, related to the first, is whether the evaluation of performance has a direct impact on performance (the incentive effect definitely exists but lets call that an indirect effect). The direct effect is due to the person feeling "on stage" and therefore less relaxed. So thinking about it this way, a question is whether performance is better when the person is relaxed or better when the person feels on stage. (The answer may depend on the person.)
(3) A third question comes from noting that pay for performance provides extrinsic reward or punishment. When there is intrinsic reward, meaning the person finds the work engaging for itself, what is the consequence of adding extrinsic reward on top of that?
These three questions are considered implicitly in this entertaining video - an animation with the voice of Daniel Pink. I encourage you to watch it. Then read my critique, because I don't think he gets the story quite right.
(4) There is then the question when you have many people doing the same sort of work in an organization if you want to use performance pay as a way to differentiate them by their productivity, or if you instead want to pay them equally because most of the observed productivity differences can be attributed to measurement error and equal pay promotes an esprit de corps among these employees that itself provides a productivity boost.
This makes the consideration of pay for performance considerably more complex than the way I left it in class, but also considerably more interesting.
Showing posts with label 02. Extending the Class Session Online. Show all posts
Showing posts with label 02. Extending the Class Session Online. Show all posts
Monday, November 12, 2012
Friday, November 9, 2012
Grades Posted in Moodle
The Midterm 1 grades, Bonus, Blog Posts 1 grades, and comments are now uploaded into Moodle. (It's a day later than I promised. Sorry about that. )
Let me make some observations about the blog posts, from the perspective of moral hazard, our next topic of study. One type of moral hazard emerges by considering the difference between renters and owners, particularly in regard to the maintenance and depreciation of a capital asset. Owners use of the asset is mindful of the impact use has on depreciation, so owners are typically gentle users of the asset. Renters, in contrast, are typically rough users since they have no concern for how the asset depreciates. Similarly, owners perform all necessary maintenance and sometimes go well beyond that (tender loving care) while renters typically avoid the maintenance costs and pass those onto the absent owners.
These notions of ownership and renting transfer to individual behavior in organizations, where there is no tangible capital asset, only the value of organization membership, a non-tangible asset. Sometimes we say a person "must take ownership" or "have skin in the game," which amounts to the same thing and means the behavior is driven by a strong sense of responsibility to the organization. In contrast, a person who "dials it in" shows little apparent effort and in that sense is behaving like a renter.
How does ownership in the organization arise and what does it mean in practice to display ownership? The latter has a particularly clear answer for group work that produces a document. Each member plays a dual role, contributor of his or her section, and editor of the entire document. It is via the editing function that ownership is displayed. Note that editing is itself a negotiation between editor and author. Friendly negotiation of this sort typically is in the form of the editor making comments and posing questions. The author has ultimate say but must address the questions and comments in a serious manner, in a way that is overt to the editor.
Because the topic was group work in one or two of the posts, the question arises whether students in our class have a sense of skin in the game in this context. My take is that most do not. The common practice is for a first draft to be produced quite near to when the final version is due. Consequently, the editing function gets short shrift.
What about how this issue pertains to our class? I am giving comments/questions to your posts like an editor would. A few students have responded to these. Most students have not. In practice, having skin in the game is encouraged in a very soft way, making the organization feel like a community. It is not typically incentivized by an explicit reward for the behavior. The class is not yet a community. Beyond the lack of response to my comments, student are not commenting on the posts by their classmates.
A more general observation about the posts is that most students are pretty good in relating what happened but are less good at explaining why it happened. Each of you would benefit from giving more attention to the why questions in your posts. You would get deeper into your topic that way.
Let me make some observations about the blog posts, from the perspective of moral hazard, our next topic of study. One type of moral hazard emerges by considering the difference between renters and owners, particularly in regard to the maintenance and depreciation of a capital asset. Owners use of the asset is mindful of the impact use has on depreciation, so owners are typically gentle users of the asset. Renters, in contrast, are typically rough users since they have no concern for how the asset depreciates. Similarly, owners perform all necessary maintenance and sometimes go well beyond that (tender loving care) while renters typically avoid the maintenance costs and pass those onto the absent owners.
These notions of ownership and renting transfer to individual behavior in organizations, where there is no tangible capital asset, only the value of organization membership, a non-tangible asset. Sometimes we say a person "must take ownership" or "have skin in the game," which amounts to the same thing and means the behavior is driven by a strong sense of responsibility to the organization. In contrast, a person who "dials it in" shows little apparent effort and in that sense is behaving like a renter.
How does ownership in the organization arise and what does it mean in practice to display ownership? The latter has a particularly clear answer for group work that produces a document. Each member plays a dual role, contributor of his or her section, and editor of the entire document. It is via the editing function that ownership is displayed. Note that editing is itself a negotiation between editor and author. Friendly negotiation of this sort typically is in the form of the editor making comments and posing questions. The author has ultimate say but must address the questions and comments in a serious manner, in a way that is overt to the editor.
Because the topic was group work in one or two of the posts, the question arises whether students in our class have a sense of skin in the game in this context. My take is that most do not. The common practice is for a first draft to be produced quite near to when the final version is due. Consequently, the editing function gets short shrift.
What about how this issue pertains to our class? I am giving comments/questions to your posts like an editor would. A few students have responded to these. Most students have not. In practice, having skin in the game is encouraged in a very soft way, making the organization feel like a community. It is not typically incentivized by an explicit reward for the behavior. The class is not yet a community. Beyond the lack of response to my comments, student are not commenting on the posts by their classmates.
A more general observation about the posts is that most students are pretty good in relating what happened but are less good at explaining why it happened. Each of you would benefit from giving more attention to the why questions in your posts. You would get deeper into your topic that way.
Thursday, November 1, 2012
In the meantime
Read chapter six in M&R on moral hazard.and the a static principal-agent model that is akin to the insurance model. Read chapter 7 as well which gives a quadratic version of the model.
We will then confront time-based approaches in chapter 8. This essay likely will be useful to you.
http://the-econ-metaphor.blogspot.com/search/label/13-The%20Economics%20of%20Time.
If you have trouble accessing it, then wait till I can post it in UofIBox.
I would say that class on Monday is unlikely, but I will continue to update as I learn more.
Sent from my iPad
We will then confront time-based approaches in chapter 8. This essay likely will be useful to you.
http://the-econ-metaphor.blogspot.com/search/label/13-The%20Economics%20of%20Time.
If you have trouble accessing it, then wait till I can post it in UofIBox.
I would say that class on Monday is unlikely, but I will continue to update as I learn more.
Sent from my iPad
Wednesday, October 31, 2012
Wednesday, September 26, 2012
Background material on the economics of risk
The last time I taught intermediate microeconomics, I made a bunch of Excel workbooks with numerically animated graphs, which I call Excelets, and then I produced some micro-lectures, one per worksheet, and delivered those as YouTube videos.
You can find the set of these on Risk and Uncertainty at the link. The Excel workbook on which these are based can also be downloaded. We might cover a few of these next week in class. It is important background information for us.
When I taught this stuff some of the better students wanted to see the algebra of expected utility worked through. So here is a micro-lecture on that and here is the PowerPoint on which the micro-lecture is based. Finally, this is the same concepts looked at graphically and the Excel file for that.
You can find the set of these on Risk and Uncertainty at the link. The Excel workbook on which these are based can also be downloaded. We might cover a few of these next week in class. It is important background information for us.
When I taught this stuff some of the better students wanted to see the algebra of expected utility worked through. So here is a micro-lecture on that and here is the PowerPoint on which the micro-lecture is based. Finally, this is the same concepts looked at graphically and the Excel file for that.
Monday, September 17, 2012
A Better Class Session - Disincentives against "nasty" behavior
There seemed to be more life in the class today. I appreciate your efforts in making it so. There was good back and forth and we got participation from many students. Both of those were delightful and in accord with my view of how things are done well with instruction. For my part, it is definitely easier to get this if I'm reacting to you already, which is one role the blogging will play for the duration of the course. I will try to do this even on days when we're not talking about the blog posts, but they'll be less context to use to make the points.
On the content of what we were talking about, I think it is time to bring in a metaphor that represents the opposite extreme of one I've already mentioned repeatedly, which is doing somebody a favor, being collegial, and promoting a trusting environment. We need to talk about nasty behavior - doing bad things to others. The next blog post is about hold up - a specific type of such nasty behavior that emerges as a person discovers that as a consequence from holding a specific asset that person has been conferred substantial bargaining power - so decides to use it. Since hold up is the specific issue Coase had in mind when he wrote the Nature of the Firm paper, it is especially important to understand it.
However, there are other types of nasty behavior that we should consider as well. Perhaps the "patron saint" for such predatory types is P.T. Barnum. He is attributed with the line:
Whether Barnum actually said the line is not important here. What is important is the source of the power conveyed by the sentiment. It is not anything that the predator possesses that gives him power. Rather it's what the sucker lacks (knowledge and common sense). The predator takes advantage of that.
Over the last 10 years there has been much written about predatory practices in financial interactions. Originators of subprime loans, for example, have put borrowers into the wrong type of loan and with excessive principal, fooling these borrowers by initial teaser interest rates that were much lower than the longer term rates. (Countrywide earned a reputation for encouraging such predatory lending.) Some responded to this history by arguing that what is needed is to raise the financial literacy of the borrowers. There may be substantial merit to this argument but do note that Bernie Madoff's customers, particularly those who lost a lot of money, were suckers yet among these are several very prominent people in New York business and social life. So, I believe, an equally compelling argument is that anyone can be cast in the role of sucker; education and intelligence may make it less likely to get duped but don't eliminate the possibility altogether. Another alternative deterrent is regulation. The new Consumer Financial Protection Bureau is aimed at doing just that.
Given that such nasty behavior is possible in the marketplace, it is probably reasonable to assume that it can also happen within organizations. So while in class today I said that management tries to encourage intrinsic motivation for its employees, as that is the way to get the best work from them and enable them to get a lot of job satisfaction, it is also true that management must spend some time providing disincentive against predatory practices by its employees. It is a darker side of the job, but some of it is certainly necessary.
Also note here that I'm sticking to predatory behavior within an economic context, as that is the scope of our course. Surely it is possible to observe other forms of nasty behavior - bullying, sexual harassment, racial discrimination, etc. The U of I, for example, deals with each of these via education and oversight. The issues are certainly interesting to consider but we won't do so in our class as they run too far afield of our subject.
On the content of what we were talking about, I think it is time to bring in a metaphor that represents the opposite extreme of one I've already mentioned repeatedly, which is doing somebody a favor, being collegial, and promoting a trusting environment. We need to talk about nasty behavior - doing bad things to others. The next blog post is about hold up - a specific type of such nasty behavior that emerges as a person discovers that as a consequence from holding a specific asset that person has been conferred substantial bargaining power - so decides to use it. Since hold up is the specific issue Coase had in mind when he wrote the Nature of the Firm paper, it is especially important to understand it.
However, there are other types of nasty behavior that we should consider as well. Perhaps the "patron saint" for such predatory types is P.T. Barnum. He is attributed with the line:
There is a sucker born every minute.
Whether Barnum actually said the line is not important here. What is important is the source of the power conveyed by the sentiment. It is not anything that the predator possesses that gives him power. Rather it's what the sucker lacks (knowledge and common sense). The predator takes advantage of that.
Over the last 10 years there has been much written about predatory practices in financial interactions. Originators of subprime loans, for example, have put borrowers into the wrong type of loan and with excessive principal, fooling these borrowers by initial teaser interest rates that were much lower than the longer term rates. (Countrywide earned a reputation for encouraging such predatory lending.) Some responded to this history by arguing that what is needed is to raise the financial literacy of the borrowers. There may be substantial merit to this argument but do note that Bernie Madoff's customers, particularly those who lost a lot of money, were suckers yet among these are several very prominent people in New York business and social life. So, I believe, an equally compelling argument is that anyone can be cast in the role of sucker; education and intelligence may make it less likely to get duped but don't eliminate the possibility altogether. Another alternative deterrent is regulation. The new Consumer Financial Protection Bureau is aimed at doing just that.
Given that such nasty behavior is possible in the marketplace, it is probably reasonable to assume that it can also happen within organizations. So while in class today I said that management tries to encourage intrinsic motivation for its employees, as that is the way to get the best work from them and enable them to get a lot of job satisfaction, it is also true that management must spend some time providing disincentive against predatory practices by its employees. It is a darker side of the job, but some of it is certainly necessary.
Also note here that I'm sticking to predatory behavior within an economic context, as that is the scope of our course. Surely it is possible to observe other forms of nasty behavior - bullying, sexual harassment, racial discrimination, etc. The U of I, for example, deals with each of these via education and oversight. The issues are certainly interesting to consider but we won't do so in our class as they run too far afield of our subject.
Wednesday, September 12, 2012
Getting on Terra Firma
You guys took me by surprise today when it seemed nobody in the class had seen the Edgeworth Box. After the class was over it occurred to me that we didn't talk about quasi-linear utility, so we have to do that, and maybe my quick coverage of the Edgeworth Box was just too quick.
So let me say the following:
(a) For your general literacy as Econ students the Edgeworth Box is important as a tool. If you want to learn more about it:
(a1) You can go here where there are a bunch of brief videos I've made on it. There is coverage about markets in the Edgeworth box, which I only briefly touched on today.
(a2) Since some of you have trouble with Google Docs for downloading Excel Workbooks, I've posted the one on General Equilibrium here. It has what I call Excelets --- there are controls you can press that move the graphs so you can better understand how the graph changes when that parameter changes.
(b) For our course the Edgeworth box is not very important at all. The concepts of Pareto Improvement and Pareto Optimality, which can be applied in contexts other than the Edgeworth Box, are important. As far as I know the are typically taught first by looking at the Edgeworth Box, but if you understand those concepts more broadly, that's fine. Then you can ignore some of the minutia of the Edgeworth Box.
(c) The one other reason for introducing the Edgeworth Box is that if the only alternative reference you have is the (partial equilibrium) supply and demand framework, then you know that the competitive equilibrium maximizes the social surplus, but it sure looks in that setting like efficiency considerations can be separated from equity considerations. As a general proposition, it isn't true. So we look at the restricted case of quasi-linear utility because it is true in that setting. Law and Econ types like Coase maintain that assumption without blinking an eye.
(d) I intended that first homework as a review to set the context for our course. There is a puzzle if you take Econ 302 too literally. Why not have only markets and all transactions taking place in them? Why have organizations as an alternative to markets? Since it seemed less review than I had thought, I wonder if what we did with the PowerPoint afterward helped in setting context. We didn't finish that and will have to return to it in the next class.
It also occurred to me that we shouldn't go so quick on covering stuff, particularly if it is newer to you than I had previously thought. So I am going to revise deadlines for things over the next few weeks to reflect that change of pace. I will write another message in a bit about those new deadlines, once I've thought through what makes sense.
So let me say the following:
(a) For your general literacy as Econ students the Edgeworth Box is important as a tool. If you want to learn more about it:
(a1) You can go here where there are a bunch of brief videos I've made on it. There is coverage about markets in the Edgeworth box, which I only briefly touched on today.
(a2) Since some of you have trouble with Google Docs for downloading Excel Workbooks, I've posted the one on General Equilibrium here. It has what I call Excelets --- there are controls you can press that move the graphs so you can better understand how the graph changes when that parameter changes.
(b) For our course the Edgeworth box is not very important at all. The concepts of Pareto Improvement and Pareto Optimality, which can be applied in contexts other than the Edgeworth Box, are important. As far as I know the are typically taught first by looking at the Edgeworth Box, but if you understand those concepts more broadly, that's fine. Then you can ignore some of the minutia of the Edgeworth Box.
(c) The one other reason for introducing the Edgeworth Box is that if the only alternative reference you have is the (partial equilibrium) supply and demand framework, then you know that the competitive equilibrium maximizes the social surplus, but it sure looks in that setting like efficiency considerations can be separated from equity considerations. As a general proposition, it isn't true. So we look at the restricted case of quasi-linear utility because it is true in that setting. Law and Econ types like Coase maintain that assumption without blinking an eye.
(d) I intended that first homework as a review to set the context for our course. There is a puzzle if you take Econ 302 too literally. Why not have only markets and all transactions taking place in them? Why have organizations as an alternative to markets? Since it seemed less review than I had thought, I wonder if what we did with the PowerPoint afterward helped in setting context. We didn't finish that and will have to return to it in the next class.
It also occurred to me that we shouldn't go so quick on covering stuff, particularly if it is newer to you than I had previously thought. So I am going to revise deadlines for things over the next few weeks to reflect that change of pace. I will write another message in a bit about those new deadlines, once I've thought through what makes sense.
Monday, September 10, 2012
Good Content - Flat Class
The class really seemed to drag today and it was probably more me than you as the cause. I started to get a sore throat later in the afternoon and have been a bit sleep deprived ahead of time because of my shoulder. I hope the sore throat and sleeplessness will pass and that my energy level is higher on Wednesday.
This is the link to the Arthur Okun essay I mentioned. On campus, it should just work, off campus you need to use VPN for access. I think it is an excellent read and it might help you out now, although it dates from 1980. Many of you are going on the job market in the not too distant future and you will start to ask yourself what it is that you want in the job, apart from the salary. Thinking of the job as an implicit contract might help you to frame what you should be asking during the interviews (and what answers you should be providing to the recruiter's questions.) It might also help you to reflect on whether you are ready to make a long term commitment to a job. (Perhaps you aren't. I definitely wasn't when I graduated, which was a big reason for going to grad school.) In any event, I like that essay a lot, so perhaps you will like it too.
Let me switch gears and talk about technology. One of the disadvantages with the approach I'm taking is that I don't have a campus Google account (they haven't given those to faculty yet) so I can't try things from the perspective of somebody who has one. The prof.arvan account is a regular gmail account, not affiliated with the university. If you use a private gmail I don't believe you should run into any technical problems. (I do believe in Murphy's Law and The Jinx, so I probably shouldn't have written that prior sentence.) I also believe in learning by doing and in passing along work-arounds to problems. So if you have some technology glitch and solve it, please post about it, either on your own blog or as a comment here. Think of doing so as providing a favor to me and your classmates.
This is the link to the Arthur Okun essay I mentioned. On campus, it should just work, off campus you need to use VPN for access. I think it is an excellent read and it might help you out now, although it dates from 1980. Many of you are going on the job market in the not too distant future and you will start to ask yourself what it is that you want in the job, apart from the salary. Thinking of the job as an implicit contract might help you to frame what you should be asking during the interviews (and what answers you should be providing to the recruiter's questions.) It might also help you to reflect on whether you are ready to make a long term commitment to a job. (Perhaps you aren't. I definitely wasn't when I graduated, which was a big reason for going to grad school.) In any event, I like that essay a lot, so perhaps you will like it too.
Let me switch gears and talk about technology. One of the disadvantages with the approach I'm taking is that I don't have a campus Google account (they haven't given those to faculty yet) so I can't try things from the perspective of somebody who has one. The prof.arvan account is a regular gmail account, not affiliated with the university. If you use a private gmail I don't believe you should run into any technical problems. (I do believe in Murphy's Law and The Jinx, so I probably shouldn't have written that prior sentence.) I also believe in learning by doing and in passing along work-arounds to problems. So if you have some technology glitch and solve it, please post about it, either on your own blog or as a comment here. Think of doing so as providing a favor to me and your classmates.
Thursday, September 6, 2012
Hub or Edge/Rules or Discretion?
There is a close parallel between asking whether decisions are made at the center or near the edge, on the one hand, and if decisions are made by following prescriptive rules or if instead they are left to individual discretion. In class yesterday I said that economists as a group are biased in favor of decentralized decision making. The argument is that a person near the edge has information about local context that the center doesn't have, so the person at the edge can make a decision that better fits the circumstance.
But there is a counter argument that you should be aware of, that says rules are better when decision makers can quite possibly exert a negative externality on others but ignore that in making their own decision. A novel example of such a negative externality is given in this essay by Atul Gawande, On Washing Hands. (You can access the full text of this article if you are on the campus network. The Library has licensed access for you. If you are at home, use the CITES VPN to attain access.) This piece made quite a stir when it first appeared. It turns out that in hospitals doctors actually make patients sick by passing along the infection one patient has and giving it to another patient, though this happens invisibly so it is difficult to pinpoint who the culprit is. Hand washing stops the spread of infection from happening. The rule is that doctors are supposed to wash their hand each time they examine a patient. But many bypass the rule - their time is scarce, hand washing is inconvenient, and too much hand washing can irritate the skin. The piece discusses ways to get better compliance with the rule.
On more familiar territory, the negative externality argument presumably justifies why there are laws against speeding and drunk driving.
But there is a counter argument that you should be aware of, that says rules are better when decision makers can quite possibly exert a negative externality on others but ignore that in making their own decision. A novel example of such a negative externality is given in this essay by Atul Gawande, On Washing Hands. (You can access the full text of this article if you are on the campus network. The Library has licensed access for you. If you are at home, use the CITES VPN to attain access.) This piece made quite a stir when it first appeared. It turns out that in hospitals doctors actually make patients sick by passing along the infection one patient has and giving it to another patient, though this happens invisibly so it is difficult to pinpoint who the culprit is. Hand washing stops the spread of infection from happening. The rule is that doctors are supposed to wash their hand each time they examine a patient. But many bypass the rule - their time is scarce, hand washing is inconvenient, and too much hand washing can irritate the skin. The piece discusses ways to get better compliance with the rule.
On more familiar territory, the negative externality argument presumably justifies why there are laws against speeding and drunk driving.
Wednesday, August 22, 2012
From my own blog - a post about teaching economics.
From time to time I'll want to say something more about what we discussed in class. I will then use this label for that purpose. Since we haven't met yet, the label is somewhat inappropriate, but I thought you might find the piece I excerpted and linked t interesting as background for the course.
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