Labor supply and effort levels of individuals and groups in experimental settings

Abstract

This dissertation explores on-the-job leisure choice in individual labor supply environments and in work teams. The individual static labor supply theory implies that income-compensated wage increases will increase hours of work--positive substitution effects on work hours. While positive substitution effects are the testable implication of the theory, numerous empirical studies estimate negative substitution effects and therefore question the empirically validity of that model. I present a framework for the individual labor supply decision that theoretically explains negative substitution effects as the result of substituting on- and off-the-job leisure. An experimental environment in which subjects perform a task for piece-rate wages provides the data to test this theory. When on- and off-the-job leisure are choice variables, the results show that average substitution effects on hours worked are positive (implying that the classical theory is robust with respect to the assumption of no on-the-job leisure) but that some individuals display negative substitution effects. This provides evidence consistent with the substitution of on- and off-the-job leisure. When only on-the-job leisure is a choice variable, the data support another theoretical extension which predicts positive substitution effects on work effort. The results have implications for employers who might try to induce more work effort (less on-the-job leisure) through income-compensated wage increases. Work team decisions are also examined in the context of the voluntary contributions mechanism for public goods provision. Expected utility theory predicts that free-riding will dominate more efficient social incentives, and that uncertainty with respect to the provision of the public good will cause even more free-riding. An experimental environment confirms the existence of free-riding in this "uncertainty" environment, but results are mixed as to whether the free-riding is worse than in situations without the uncertainty. When the probability of public goods provision increases in group contributions, higher marginal incentives promote higher contributions. These results have implications for work team managers. If uncertainty lowers contributions, compensation based on effort instead of outcomes may raise effort. However, since higher contribution levels raise marginal incentives, any way in which a team manager could raise effort would be beneficial since it would promote high future effort.