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Ray Fisman at Slate describes a new paper by David Card, Alexandre Mas, Enrico Moretti and Emanual Saez . These researchers use publicly available salary data for the University of California to study whether workers are disgruntled when they learn they are earning less than their colleagues. The Sacramento Bee has a website which allows anyone to search for salaries by name or institution. The researchers told some employees about the website so they could search for information about their colleagues’ salaries. They then asked all employees about their job satisfaction. Comparing the groups gives an estimate of the impact of knowing salaries on job satisfaction. Fisman reports:
On average, receiving SacBee information via e-mail had little effect on job satisfaction or job-search plans. But when the researchers divided the sample in half—those above the median pay level for comparable individuals in their department and those below—they found low earners were significantly more likely to report low job and wage satisfaction if they received the SacBee e-mail. The SacBee e-mail had an even greater impact on the likelihood of low wage earners responding that they would be looking for a job in the coming year. (One respondent even sent a note to the researchers letting them know that he handed in his resignation shortly after checking his colleagues’ salaries on the SacBee Web site.) Surprisingly, high earners didn’t revel in their relative superiority—exposure to the SacBee Web site had no effect on their job satisfaction or likelihood of looking for a new job. (The researchers also found that both low and high earners expressed greater concern for income inequality in America after poking around the SacBee’s salary database.)
I’ve dressed up this post to look intellectual but really I know and you know that we want the juicy stuff:
1. Fisman’s link to the SacBee website is here.
2. What about other universities? Dan Hamermesh’s Gossip Files provide some more information….
Stalin stayed in Moscow during WWII to lead resistance against the approaching German armed forces. He was putting his own life at risk. Why do leaders have to take costly actions to persuade followers to follow?
A seminal paper Leading by Example (jstor link) by Ben Hermalin (AER 1998) has an answer based on a classical signaling model. Suppose a leader wants followers to exert costly effort. The ideal level effort depends on some factor known only to the leader. Stalin might have a better idea as to the chances of success against the Germans; or a C.E.O. might have better information about the state of demand. What if the leader simply tells the followers his information? Of course, this is Cheap Talk. If the leader wants the followers to exert high effort whatever the true state of affairs, the followers cannot believe anything the leader says. For example, Stalin might tell his troops to fight hard whether they have a good chance of beating the Germans or not. Communication breaks down and the followers’ effort cannot be a function of the truth.
The picture changes if the leader can himself exert costly effort and lead by example. Then, he might only be willing to work hard if and only if he thinks the chances of his effort paying off are good. Stalin’s decision to stay in Moscow signals that he believes that his life is likely to be safe as the chances for Soviet success are good. If the Germans have the advantage, he does truly risk his life and would prefer to leave Moscow. As the leader’s incentives to send the signal or not depend on the true state of affairs, his “message” is credible. The followers can then fight hard or work hard if and only if the leader leads by example and works hard himself.
“Actions speak louder than words” and Costly Signaling is more informative than Cheap Talk. Hence leaders must lead by example because words cannot be believed while actions can. This is the heart of Hermalin’s idea.
Once you buy into the framework, it is easy to think of variations. Hermalin does not talk explicitly about competition but let’s add that in. If things are going well for the organization in the product market, then the competition does not matter – you have a good product so you can slack off. More importantly the leader slacks off and the followers do too. If the organization is defunct if the crew does not pull the oars hard, the captain has a good incentive to pitch in and row. So, this is similar to the first Hermalin story except the leader works hard when the going is bad and effort is very important and not when the going is good. The followers do the same.
Another variation: Middle managers looking to get promoted have weird incentives. They want to signal how hard-working they are to their superiors. They want to work hard even when the going is bad. So, the followers cannot filter out the true state from the middle manager’s effort. The followers will slack off. The middle manager cannot be a credible leader by example as signaling to his superiors destroys the credibility of the signal to his juniors. This is a good reason to appoint someone who does not want to be senior manager into the middle position. Hence, looking at the leading by example issue alone, academic department should appoint Chairs who do not have any ambition to rise further in the hierarchy. Many other examples can be given…
Sarah Palin puts her toe in the water in Iowa and Robert Gibbs calls her:
“a formidable force in the Republican Party and may well be, in all honesty, the most formidable force in the Republican Party right now.”
On the other hand:
“While popular among conservatives, Palin still has a long way to go with other Americans. A CBS News poll on Thursday said 46 percent of American voters viewed Palin unfavorably, compared with 21 percent who have a favorable opinion of her and 33 percent who are undecided.”
The atmosphere of melancholia on the show Mad Men has to broken by brief bursts of bright comedy or an undercurrent of sexual intrigue. In this instance, the show indulged in the use of (at least) three strategic ploys to distract us from the plight of sad, newly divorced Don Draper regretting he boinked his secretary.
Draper’s ad agency SCDP is facing competition from a small entrant, say agency X (I forgot the name). SCDP has lost some accounts and is bidding for a new contract from Honda. Honda has put strict limits on the bid, stipulating that only a storyboard should be presented, not a filmed ad. SCDP cannot afford to produce a filmed ad and nor can agency X. Also, Don believes the Japanese might not appreciate the rules of their auction being broken. He comes up with a bluff: pretend to make a filmed ad and thereby trick agency X into making one. The Japanese will reject them and agency X will be driven close to bankruptcy. The ploy works not because of the clichéd Japanese cultural stereotype embraced by Don but because Honda is using its own strategic ploy: it gets a better deal from its existing agency by threatening to switch to the winner from the auction.
Two players bluffing and lying.
And then another player, Dr. Faye, reveals her bluff. She is not really married and is wearing a wedding ring to ward off unwanted male attention. She tells Don and he wonders why she told him. Faye smiles slightly. We know why she revealed her hand and we wonder why Don doesn’t get read it. Married-Winner-Don of Seasons 1 to 2 and perhaps even Season 3 would have worked it out immediately. But Single-Loser-Don of Season 4 is missing even blindingly obvious signals. I guess codes will be broken in a later show.
Jeff discussed a seminal game theoretic analysis of Cheap Talk in an earlier post: “Strategic Information Transmission” by Crawford and Sobel studies a decision-maker, the Receiver, who listens to a message from an informed advisor, the Sender, before making a decision. The optimal decision for each player depends on the information held by the Sender. If the Sender and Receiver have the same preferences over the best decision, there is an equilibrium where the Sender reports his information truthfully and the Receiver makes the best possible decision.
What if the Sender is biased and wants a different decision, say a bit to the left of the Receiver’s optimal decision? Then the Sender has an incentive to lie and move the Receiver to the left and always telling the truth is no longer an equilibrium. Crawford and Sobel show that this implies that in equilibrium information can only be conveyed in lumpy chunks and the Receiver takes the best expected decision for each chunk. The bigger the bias, the less information can be transmitted in equilibrium and the larger each lump must be.
The Crawford-Sobel model has differences of opinion generated by differences in preferences. But individuals who have the same preferences but different beliefs also have differences of opinion. The Sender and Receiver may agree that if global warming is occurring drastic action should be taken to slow it down. But the Sender may believe it is occurring while the Receiver believes it is not. Differences in beliefs seem to create a similar bias to differences in preferences and hence one might conjecture there is little difference between them. A lovely paper by Che and Kartik shows this is not the case. If the Sender with a belief-based bias acquires information, his belief changes. If signals are informative, his beliefs must move closer to the truth and his bias must go down. If Sender with a preference-based bias acquires information, his bias by definition does not change. So, when there are belief-based differences in opinion, information acquisition changes the bias, indeed it reduces it. This allows the Sender to transmit more information in equilibrium and improve the Receiver’s decision implementation (this is the Crawford-Sobel intuition but in a different model). The Sender values this influence and has good incentives to acquire information. Hiring an advisor with a different belief is valuable for the decision-maker, better than having a Yes-Man. Some pretty cool and fun insights. And it is always nice when the intuition is well explained and it is related to classical work
There is lots of other subtle stuff and I am not doing justice to the paper. You can find the paper Opinions as Incentives on Navin’s webpage.
In a recent episode of Top Chef, the remaining contestants were split into two groups, say A and B. Group A had to vote for the best and worst dishes in Group B and vice-versa. One the two contestants with the worst dishes gets eliminated by the usual judges, i.e.not the contestants.
All the contestants cooked in the same kitchen so they could match each dish to each chef (and, in any case, each chef introduced his own dish). So, each voter knows which chef’s chances of surviving she is affecting by voting for or against his dish. In the next episode, each voter – if they survive till the next round – competes with the remaining chefs. So, other things being equal, the optimal strategy is simple: each voter should vote for the weakest candidate in the other group and against the strongest candidate. There have been enough episodes for everyone to pretty much agree on who the best and worst cooks are in each group. The “rational choice” calculation: you want to maximize the chances of winning so you want to be matched up against the worst chefs in future rounds and get rid of the best chefs if possible.
One caveat is that in future rounds, contestants will be judged by the usual crew of Tom, Padma etc so you might care about your reputation with them. But the evidence from past series strongly suggests that they do not vote against “strategic” contestants. Food is important and, for the producers, drama. Strategic behavior might actually help you survive longer if you create drama.
This “rational choice” prediction had at most a 50% success rate. One group did choose one of the strongest contestants, Kenny, from the other group for the worst dish. And he did claim that he’d been put on the chopping block to eliminate a future threat. But the strongest guy in the other group, Angelo, did not get close to elimination. And maybe Kenny did have the worst dish.
It’s interesting to speculate on why the obvious rational choice prediction is not borne out. Perhaps people are honest or it is very hard to lie about a dish when its obviously good – the verifiable information makes it difficult to dissemble. It’s also hard to be disliked. The contestants all live in the same house. In some episodes they cook together and have to coöperate. Everyone cam remember the hated Marcel from an earlier season! Voting is sequential which exasperates the problem – the first person to vote does not want to come out as an evil strategic player and the later people to vote know they can’t impact the outcome anyway. So, perhaps reputation among the contestants themselves is important.
If they use the same Cold War conceit next season, I would love to have anonymous voting. Behind the veil of ambiguity, people might be more strategic. It would add to the drama – the following week’s episode will be full of intrigue if a good chef gets knifed (figuratively!) in the back.
Suppose in a Department in a university there are two specializations, E and T. The Department has openings coming up over time and must hire to fill the slot when it appears or let it lapse, perhaps with some chance of getting it the following year.
The Department can hire on the “best athlete” criterion: just choose the best candidates, regardless of specialization. Or it could have a “Noah’s Ark” approach and let in one E specialist for each T specialist (perhaps this is done intertemporally if there are less than two slots/year). Both approaches are used in hiring in practice. How does the best approach depend on the environment?
To think this through, let’s suppose the Department uses the best athlete criterion. There are two problems. First, if specialty T has lower standards than specialty E, they will propose more candidates. They may exaggerate their quality if it is hard to assess. Or specialty T may simply want to increase in size – there will be more people to interact with, collaborate with etc. How should specialty E respond? They know that of they stick to their high standards, the Department will be swamped by Ts. So, they lower their bar for hiring, reasoning that their candidate has to be better than the marginal candidate brought in by the Ts, a weaker criterion. In other words, the best athlete hiring system leads to a “race to the bottom”.
Hiring by the Noah’s Ark system prevents this from happening. The two groups might have different standards or want to empire build. But the each group is not threatened by the other as their slots are safe. This comes at a cost – if the fraction of good candidates in each field differs from the slot allocation in the Department, it will miss out on the best possible combination of hires. So, if the corporate culture is good enough and everyone internalizes the social welfare function, it is better to have the best athlete criterion.
A new C.E.O. is appointed. What are the opinions of the employees and how are they going to react?
In England, where I grew up, the cliche is that people are looking for excuses to denigrate successful people and pull them down. Envy is the pertinent sin from the seven deadlies. My intuition for American norms is poor but my impression is that employees will rally around the C.E.O. Contradictory data is ignored and a big fan club develops spontaneously.
If employees diss or extol the boss whatever her true qualities, a rational observer cannot infer anything about the C.E.O. in cultural equilibrium. But if observers herd, there is an idolatry bubble. In an American bubble, the C.E.O. is a superstar. When the facts come out, the bubble bursts and the C.E.O.’s collapse is huge. In an English bubble, once the C.E.O. departs, employees will look back fondly on her tenure while complaining about the new C.E.O. (Tony Hayward straddles both cultures so it hard to classify him!)
Careful investors should short American firms and go long on English firms.
An executive rises through the ranks at a large organization and becomes C.E.O. He makes terrible decisions or is a passive leader, letting the firm slide into obscurity. The firm is publicly traded and poor performance is observable. But the C.E.O. manages to get another great job, leading a “turnaround” at another large organization. He uses the same strategy that performed so badly in the first firm. His second firm also goes down the tube. This story is loosely based on an example I use in one of my M.B.A. classes. And I have another new example. How can it happen?
The first theory is pretty simple. If a project fails, it is hard to know where to lay the blame – the economic climate, the C.E.O., bad luck etc. etc. The the C.E.O. can come up with a story that helps him look like a leader not a loser. Even worse, the people he works with want to get rid of him. Perhaps they say nice things and sell a lemon to someone else. The potential recipients of the lemon should know the perverse incentives in play and avoid the winner’s curse. Perhaps the consult insiders they trust and with whom they will likely have a long future relationship.
But this theory does not accommodate cases where the C.E.O. publicly proposed and pushed a failed strategy at the first firm. Or very obviously did not do his job. Even these characters can pull off a successful exit. The rationale for this phenomenon has two parts: (a) the pool of viable potential leaders is small and (b) very few people have the experience of running a large organization. So, even if they performed poorly, perhaps they can learn from their mistakes and do better the second time around.
This presumes that a known bad performer carries less risk than an unknown performer because the former has experience. I find it hard to believe. A rational choice interpretation would be nice for the conscious purchase of a known experienced lemon who might change over a potential inexperienced mango.
You are a poor pleb working in a large organization. Your career has reached a stage where you are asked to join one of two divisions, division A or division B. You can’t avoid the choice even if you prefer the status quo – it would be bad for your career. Each division is controlled by a boss. Boss A is sneaky and self-serving. perhaps he is “rational” in the parlance of economics. Even better, perhaps his strategy is quite transparent to you after a brief chat with him so you can predict his every move. He is the Devil you know. Boss B might be rational or might be somewhat altruistic and have your best interests at heart. He is the Devil you don’t know. Neither boss is going anywhere soon and you have no realistic chance of further advancement. You will be interacting frequently with the boss of the division you choose.
Which division should you join?
You face a trade-off it seems. If you join division A, it is easier for you to play a best-response to boss A’s strategy – you can pretty much work out what it is. If you join division B, it is harder but the fact that you don’t know can help your strategic interaction.
For example, suppose you are playing a game where “cooperation” is not an equilibrium if it is common knowledge that both players are rational – the classical story is the Prisoner’s Dilemma. Then, the incomplete information might help you to cooperate. If you do not cooperate, you reveal you are rational and the game collapses into joint defection. If you cooperate, you might be able to sustain cooperation well into the future (this is the famous work of Kreps, Milgrom, Roberts and Wilson).
On the other hand, if you are playing a pure coordination game, this logic is less useful. All you care about is the action the other player is going to take and you want to play a best response to it. So, the division you should join depends on the structure of the later boss-pleb game.
Perhaps it is possible to frame this question in such a way that the existing reputation and game theory literature tells us if and when incomplete information should be welcomed by the pleb so you should play with the Devil you don’t know and when it is bad, so you should play with the Devil you know?
Some organizations have clearly defined goals and many of the tactics to meet their goals come readily to mind. An economics department wants to produce the best research possible and the best grad students possible. They try to hire great professors, train students well and place them in good universities. If the organization is resource constrained, there will be conflict. A good leader for this kind of organization needs strong arbitration and mediation skills but not vision. A neutral player is the ideal leader. A leader with strong preferences one way or the other will alienate some members and escalate conflict. Only if the organization needs to radically alter course will vision be required. For example, if an economics department wants to leap up in the rankings or is in danger of decline, a visionary needs to take control.
But in most organizations and at most points in time, things are not so easy. A firm wants to maximize profits but how should it do so? For example, Microsoft has done very well for itself but how many it avoid being left behind as Apple and Google capture the imagination of new consumers? And Microsoft needed a vision when it started and when it grew. In some organizations, there is a fundamental uncertainty about what an organization should be doing and where it should be going. Almost everyone may accept that the status quo is not sustainable and that a leader with a vision for the organization should take control. In this scenario, there are common values among the members of the organization and for better or worse it will move in some direction established by the vision of the leader. If everyone does not agree, then the organization will stay at the status quo. It may slowly or even rapidly depreciate. Only a random shock can salvage it.
Obama has two focal options in Afghanistan, “Stay the Course” or “Cut and Run”. Stay the Course means continuing the current counterinsurgency (COIN) strategy of “winning hearts and minds” of Afghan civilians. Cut and Run means getting out as soon as possible and leaving the Afghans to deal with their own mess. In either scenario it is optimal to sack McCrystal.
McCrystal is a strong believer in COIN so if you want to Cut and Run, it s better to replace him with someone else, a true believer in Cut and Run. If Obama wants to Stay the Course, McCrystal is a possible candidate. But there is a reputational cost, looking weak, to Obama of retaining McCrystal. Replacing him carries the risk that the COIN strategy fails. But Petraeus is the author of COIN so this risk is minimized if Petraeus replaces McCrystal. So, even if you want to Stay the Course, it is optimal to sack McCrystal.
Pretty simple?
You (the sender) would like someone (the responder) to do you a favor, support some decision you propose or give you some resource you value. You email the responder, asking him for help. There is no reply. Maybe he has an overactive Junk Mail filter or missed the email. You email the responder again. No reply. The first time round, you can tell yourself that maybe the responder just missed your request. The second time, you realize the responder will not help you. Saying Nothing is the same as saying “No”.
Why not just say No to begin with? Initially, the responder hopes you do not send the second email. Then, when the responder reverses roles and asks you for help, you will not hold an explicit No against him. By the time the second email is sent and received, it is too late – at this point whether you respond or not, there is a “No” on the table and your relationship has taken a hit. The sender will eventually learn that often no response means “No”. Sending a second email, while clearing up the possibility the first non-response was an error, may lead to a worsening of the relationship between the two players. So, the sender will weigh the consequences of the second email carefully and perhaps self-censor and never send it.
Then, Saying Nothing will certainly be better than Saying No for the responder and a communication norm is born.
Cheap Talk 