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Human resource management and productivity in the “trust game corporation”

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Abstract

Contemporary production activity is crucially determined by the performance of complex tasks with the characteristics of corporate trust games. In this paper, we outline a productivity paradox showing that, under reasonable conditions, the noncooperative solution, which yields a suboptimal firm output, is the equilibrium of corporate trust games when relational preferences are not sufficiently high. We show that tournaments and steeper pay for performance schemes may crowd out cooperation in the presence of players preferences for relational goods. These findings help to explain firm investment in workers’ relationships and the puzzle on the less than expected use of such schemes.

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Notes

  1. To quote just some of the innumerable examples of corporate “teambuilding” practices, one of the biggest Italian banks, Mediobanca, finances weekend skying holidays, and the Italian telecom company sailing holidays, to its management and white collars with the goal of increasing their group working attitudes.

  2. Note that we define as cooperative solution the equilibrium given by the (share, not abuse) pair of strategies (see Fig. 1) and as noncooperative solutions the (do not share, abuse) and (share, abuse) equilibria which do not imply the joint work of the two players. Hence, the term cooperative is not referred to the structure of the game (or to the coordination/noncoordination of players decisions) but to the characteristics of its equilibrium.

  3. Bruni and Stanca (2008) document how relational goods impact positively on life satisfaction. Frey et al. (2007) provide theoretical explanations for the underinvestment in relationship. Other theoretical models highlighting important elements of the relational good approach such as the conditionality of the enjoyment of leisure invested in relational goods to the investment choice of partners are those of Corneo (2005), Jenkins and Osberg (2003), Antoci et al. (2007) and Bruni et al. (2008).

  4. Following Greig and Bohnet (2008, p. 2) “Reciprocity is an internalized norm, inducing people to respond to kindness with kindness and to unkindness with unkindness, even if it is not in a person’s material self-interest to do so. It differs fundamentally from cooperation in repeated games where reputational concerns can enforce ‘cooperation’” (e.g., Kreps et al. 1982; Fudenberg and Maskin 1986).

  5. An individual is guilt averse when she suffers a disutility from guilt where, according to Baumeister et al. (1994), guilt is intended as …“an unpleasant emotional state … that is caused by the infliction of harm, loss, or distress on a relationship partner (p. 245)”. Corazzini et al. (2007, p. 2) add that “If subjects feel guilty because of (believing that they are) letting others down, they shoulder psychological costs of lying. These costs increase with the perceived harm of deceiving others (see Baumeister et al. 1994 and Dufwenberg 2002)”.

  6. The crowding-out hypothesis relies on the assumption that if workers are already intrinsically motivated, an extrinsic reward over motivates them leading the latter to react by reducing the motivation which is under their control (i.e., the intrinsic motivation).

  7. Consider for instance a blueprint in which different skills are production inputs related by some forms of complementarity, or to the definition of a corporate strategy which requires participants from different firm divisions to share knowledge and skills. The same scheme could be applied in different fields of activity such as, for instance, a coauthored academic working paper to which different researchers contribute with their specialized skills.

  8. The implicit assumption here is that an authority external to the two players will pick up the best individual “blueprint” (in the case of equal value, any individual project will have a 50% chance of winning).

  9. The implicit assumption here is that the two players’ competencies and skills do not overlap. If they do, the total output of player B in the (s, a) solution and the one shared by the two players in the (s, na) solution should be interpreted as the nonoverlapping part of the sum of the two stand alone contributions. A second assumption implied by our complete information framework is that the trustee has sufficient skills to be able to understand the contribution provided by the trustor and to abuse of it.

  10. With \( \ h_{a} = h_{b}\ \) the trustor will still have a 50% chance of winning and, therefore, a relatively higher payoff when choosing the nonsharing strategy.

  11. We reasonably assume that when player B abuses, he exploits player A information for his own project before starting the cooperative process of jointly performing the task and, therefore, e = 0.

  12. Note that the trustor would, in principle, decide not to share also if \( e > h_{a} + h_{b}, \) but his payoff from the information sharing equilibrium is lower than the opportunity cost (the payoff occuring when the decision is to not share), that is, if \( e > h_{a} + h_{b} \). However, as it easy to check, these two conditions cannot be jointly met.

  13. δ is the inverse of the subjective discount rate or the standard measure of players’ “patience”. Higher values of δ can also be viewed as a measure of the reduced distance between two consecutive stages of the game.

  14. Farrell and Maskin (1989).

  15. In the static game, if player B abuses, player A would be indifferent whether sharing or not sharing because his payoff would always be 0. However, the payoff for B would change following A’s choice: if A does not share, B can only get \( h_{b} \) by abusing, while if A shares, B gets \( h_{a} + h_{b} . \) In the latter case, B would abuse even with higher values of e (e ≤ h a  + h b ).

  16. We use the concept of stationary equilibrium as a “pair of strategies that prescribe to play the stage-game Nash equilibrium at every stage” (Burkov and Chaib-draa 2010) or, equivalently, as “the equilibrium of the corresponding one-round game, repeated in every round” (Myerson 1991).

  17. It is easy to check that the pay for performance incentive, which is compatible with nonnegative profits, is \( s < 1 - [2w/(h_{a} + h_{b} + e)] \) under the (s, na) strategy; \( s < 1 - (2w/h_{i}),\) where h i  = Max[Max(h a , h b )], under the (ns,a) strategy and s < 1 − [2w/(h a  + h b )] under the (s, a) strategy.

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Acknowledgments

The authors thank Luciano Andreozzi, Masahiko Aoki, Avner Ben Ner, Bruce Chapman, Allen Kaufman, Bruno Frey, Lorenzo Sacconi, Jolene Skordis, Alessandro Vercelli, OliverWilliamson for their comments. A special thank to Annalisa Luporini for her precious suggestions. The usual disclaimer applies.

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Authors and Affiliations

  1. Department of Economics and Institutions, University of Rome Tor Vergata, Via Columbia 2, 00133, Roma, Italy

    Leonardo Becchetti

  2. University of Tuscia, Viterbo, Italy

    Giuseppina Gianfreda

  3. University Ca’ Foscari of Venice, Venice, Italy

    Noemi Pace

Authors
  1. Leonardo Becchetti
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  2. Giuseppina Gianfreda
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  3. Noemi Pace
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Correspondence to Leonardo Becchetti.

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Appendix

Appendix

See Figs. 1, 2, 3 and 4.

Fig. 1
figure 1

The uniperiodal full information game

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Fig. 2
figure 2

The uniperiodal full information game with relational goods

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Fig. 3
figure 3

The uniperiodal full information game with pay for performance schemes

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Fig. 4
figure 4

The uniperiodal full information game with relational goods and pay for performance schemes

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Becchetti, L., Gianfreda, G. & Pace, N. Human resource management and productivity in the “trust game corporation”. Int Rev Econ 59, 3–20 (2012). https://doi.org/10.1007/s12232-011-0143-8

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