## Healthcare Economist

Unbiased Analysis of Today's Healthcare Issues

## Trust your employees, Increase Productivity

Written By: Jason Shafrin - May• 29•09

At least that is what a study by Falk and Kosfeld (2006) found.

The research question they tested was if the principal can set a minimum level of x, should they?  An economist would say, of course.  The agent has an incentive to not work at all.  Setting a minimum level of work would guarantee a return for the principal.  To test this, they set up the following experiment.

• An agent (worker) must decide on a level of x, which is seen as a proxy for work.  The cost function is simply c(x)=x.  They have an initial salary of 120.  Thus, their payoff is 120-x.
• The principal (boss) wants the agent to choose a large x (aka to work as much as possible.  Their payoff is 2x.
• If the agent decides x=20, then the worker gets 100 and the principal gets 40.

However, it turns out that setting a minimum level of x is counterproductive.  By setting the minimum level of x, this shows that the principal does not trust the agent.  This leads the agent to choose a lower level of x chosen by the worker.  For instance, if the principal chooses a minimum x of 5, the agents chose x=12.2 on average.  However, if the principal does not choose a minimum x, then the agent chose an average x of 25.1.Further, principals knew this would happen.  About two-thirds of principals decided not to dictate a minimum level of x.

The best interpretation of these results can be shown by an excerpt from the memoirs of David Packard, the founder of Hewlett-Packard (HP):

“In the late 1930s, when I was working for General Electric…, the company was making a big thing of plant security. … GE was especially zealous about guarding its tool and parts bins to make sure employees didn’t steal anything. Faced with this obvious display of distrust, many employees set out to prove it justified, walking off with tools and parts whenever they could. … When HP got under way, the GE memories were still strong and I determined that our parts bins and storerooms should always be open. … Keeping storerooms and parts bins open was advantageous to HP in two important ways.  From a practical standpoint, the easy access to parts and tools helped product designers and others who wanted to work out new ideas at home or on weekends. A second reason, less tangible but important, is that the open bins and store- rooms were a symbol of trust, a trust that is central to the way HP does business” (David Packard, 1995, p. 135).

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