Research Papers, March I 2021

Research papers on: Minimal wage literature review, Agency theory & entrepreneurship, Crisis Management, HR.

Photo by Steve Johnson on Unsplash

MYTH OR MEASUREMENT: WHAT DOES THE NEW MINIMUM WAGE RESEARCH SAY ABOUT MINIMUM WAGES AND JOB LOSS IN THE UNITED STATES?, by David Neumark & Peter Shirley, January 2021

Depending on what one reads about how economists summarize the evidence [of the research on minimum wage], one might conclude that: (1) it is now well-established that higher minimum wages do not reduce employment, (2) the evidence is very mixed with effects centered on zero with no basis for a strong conclusion one way or the other, or (3) most evidence points to adverse employment effects.

Summarizing the research literature … our key conclusions are as follows:

1. There is a clear preponderance of negative estimates in the literature. In our data, 79.3% of the estimated employment elasticities are negative, 55.4% are negative and significant at the 10% level or better, and 47.9% are negative and significant at the 5% level or better.
2. This evidence of negative employment effects is stronger for teens and young adults, and more so for the less-educated.
3. The evidence from studies of directly-affected workers points even more strongly to negative employment effects.
4. The evidence from studies of low-wage industries is less one-sided, with 66.7% of the estimated employment elasticities negative, but only 33.3% negative and significant at the 10% level or better, and the same percent negative and significant at the 5% level or better. We suggest, however, that the evidence from low-wage industries is less informative about the effects of minimum wages on the employment of low-skill, low-wage workers.

Agency theory and entrepreneurship: A cross-country analysis, by Shelby J. Solomon et al.

Abstract: Central to economic development is entrepreneurship. Using an agency theory lens, we seek to better understand how national policy can spur entrepreneurship. Guided by capitalist and socialist logic and ideals we investigate the direct and joint effects of market freedom and social spending national policies. In drawing from a sample of 19 countries spanning 2004–2010, we find that neither market freedom nor social spending alone positively impacts entrepreneurial activity; however, an interaction exists, as entrepreneurial activity is bolstered when enhancing market freedom and social spending complement one another. Findings suggest mixed national policies that combine market freedom and social spending are best positioned to spur entrepreneurship.

Our broad research question asks the following: what policy mechanisms are most useful for guiding the actions of nascent entrepreneurs as agents to start firms and therefore provide to society as their principal?

From the perspective of agency theory, designing a system that encourages agents to fully utilize their full set of expertise while tying the rewards to superior performance is the essence of incentive alignment. We also suggest how the welfare state, a key element of social oriented national policy, may be beneficial to entrepreneurship by serving as a social safety net to insure against some of the employment risk associated with entrepreneurship.

Agency theory suggests that principal’s contract with agents because agents are more skilled or informed to deal with certain matters (Fama & Jensen, 1983; Ross, 1973). Consequently, hindrances to agents, other than those
designed specifically to discourage deviance, serve only to limit the
utility agents provide to principals. In addition to incentivizing entrepreneurs to utilize their expertise, free markets also entail financial rewards to further align the incentives of entrepreneurs and society

Loss aversion is core assumption of agency theory that serves to accentuate many agency problems because principals can often diversify risks, but agents cannot (Eisenhardt, 1989). Accordingly, agents may seek out less risky options that are also less helpful for the principal. In the face of such issues, agency theorists often rely on contractual mechanisms to help mitigate the agents’ loss-averse tendencies (Core et al., 1999; Eisenhardt, 1989; Singh & Harianto, 1989). Loss aversion is a central theme in agency theory and throughout mainstream social science research that has been supported repeatedly (Baumeister, Bratslavsky, Finkenauer, & Vohs, 2001).

…if the pool of potential entrepreneurs is loss averse and often shies away from entrepreneurship whereas society, as a principal, desires the public to
become entrepreneurs, then a contractual mechanism designed to mitigate the loses associated with entrepreneurial failure could help foster entrepreneurship. Social spending is one viable mechanism to serve the purpose of reducing losses associated with entrepreneurial failure. Olds (2013; 2014) theorizes that the main barrier to entrepreneurship for many individuals is the fear of leaving their waged jobs without insurance of income in the event that their ventures fail.

Market freedom lures in potential entrepreneurs with the promise of profits, whereas social programs mitigate the potential downsides of entrepreneurial
failure and reduce potential entrepreneurs’ fears of leaving salaried employment. This line of supplemental reasoning is similar to the concept of the swollen middle, whereby employers often use a combination of base pay and pay for performance, rather than relying on one compensation strategy, to offset the dual threats of shirking and cheating (Hennart, 1993).

Similar to the prescriptions of agency theory and compensation research, we suggest that incentive alignment tactics and contractual mechanisms most often are best used alongside each other. Using both tools at once allows each to compensate for the other’s weaknesses. Market freedom produces attractive rewards whereas social spending provides contractual risk-mitigating benefits. When applied to the current study, this suggests that entrepreneurial activity should be greatest within countries with a concomitance of both types of national policies.

We believe it is possible that the relationship between market freedom
and national levels of entrepreneurship displays a pattern of diminishing
returns. That is, market freedom may explain a great amount of variance
in national levels of entrepreneurship up until a point of maturity at
which the gains in terms of entrepreneurship begin to level off or
diminish.

Our results may be practically interpreted as indicating that, if a country has a given level of market freedom and its level of social spending increases by one standard deviation (i.e., 5.79 GDP percentage points), the country will increase overall entrepreneurial activity in terms of total early-stage
entrepreneurial activity by 0.03 standard deviation units.

THE POLITICAL ECONOMY OF CRISIS MANAGEMENT: SURPRISE,
URGENCY, AND MISTAKES IN POLITICAL DECISION MAKING, by Roger D. Congleton

ABSTRACT: This paper provides an overview of the politics of crisis management using a minor, but significant extension of the core rational choice models of political decision making. The focus of analysis is crisis management within democratic polities, although much of it will also apply to crisis management within private organizations and indeed for personal crises. The analysis has several general implications for the politics of crisis management and for designing routine procedures for crisis management. As demonstrated below, an important and unavoidable property of crisis management is an unusually high propensity for making policy errors. Standing procedures for dealing with crises should be designed with such mistakes in mind.

A crisis typically has three characteristics. First, a crisis is unexpected, a
complete surprise. Second, a crisis is normally unpleasant in that current
plans are found to work less well than had been anticipated. Third, a crisis
requires an urgent response of some kind.

Not every serious problem is a crisis.

As demonstrated below, an important and unavoidable property of crisis management is an unusually high propensity for making policy errors. Standing procedures for dealing with crises should be designed with such mistakes in mind.

The existence of a crisis does not usually change fundamental political incentives, nor does political decision making avoid the information problems
associated with surprise and urgency. Elected officials remain principally interested in broad policy issues that advance their electoral interests. Voters remain interested in maximizing their lifetime utility, whether in a crisis or not, and will vote for politicians and parties whose crisis management most advances their interests, given each voter’s understanding of the policy alternatives and crisis at hand. The surprise and urgency of policy decisions during times of crisis implies that voters are more likely be mistaken in their assessments of their long-run interests.

Urgency rules out a careful analysis of long-term political interests by both voters and politicians. Policy responses to crisis will be based on less information than would have been available if policy decisions could be postponed until the next election. Democratic crisis management is, consequently, more error prone than normal democratic policy making is.

Government officials will simply appear to be less competent after periods of crisis than in ordinary times. Indeed, the logic of crisis management implies that this is necessarily the case.

It is often difficult to distinguish among bad luck, incompetence, and institutional failure.
Consequently, crisis cascades can easily lead to constitutional crises as
routine governmental procedures fail to produce satisfactory policy decisions
for the crises at hand. A constitutional crisis may also arise because of
internal or external attacks on constitutional procedures, as when elected
officials willfully ignore constitutional limits, challenge long-standing constitutional practices, or a coup d’e´tat is undertaken.

The essential problem of constitutional crisis management, however, is
not irreversibility, but rather the mistake-prone nature of rapid decision
making in circumstances of limited information.

First, plan ahead. Urgency implies that there will be little time to explore
alternative courses of action during a time of crisis. So, it is sensible to
investigate and plan for crises before they happen to the extent that this
is possible. Although surprise is a fundamental characteristic of all crises,
ignorance of future crisis scenarios and policy responses to them can be
reduced by creative analysis and planning

Second, correct errors. Insofar as policy mistakes are unavoidable during
times of crisis, the standing procedures for dealing with crisis should allow
policy mistakes to be discovered and corrected at relatively low cost. This is,
of course, one reason for having regular and routine popular elections rather
than electing persons for lifetime terms of office. All emergency policies
should have explicit ‘‘sunset’’ provisions so that policies are carefully reviewed
after the immediate crisis has passed and better information becomes
available.

Third, avoid big mistakes. A well-designed constitution should be crisis
proof. It should be designed to handle the urgent unforeseen problems in a
manner that does not threaten its fundamental decision procedures and
constraints. Urgency implies that streamlined decision processes can be
productive during times of crisis. However, emergency powers should not be
used as a method of circumventing normal constitution practices.

Fourth, wait for the dust to clear. Constitutional amendments during
times of crisis should be avoided to the extent possible, because changes in
the fundamental procedures and constraints of governance are difficult to
reverse and, consequently, constitutional mistakes tend to be far more costly
than ordinary policy mistakes. To avoid such mistakes, procedures for
dealing with crises should be designed, implemented, and revised during
times that are relatively free of crisis

Although crises are by their nature unanticipated and unanticipatable, crisis management can be routinized within limits. The costs of policy mistakes can be minimized by conducting policy research that reduces ignorance about possible problems and responses, creating narrow, streamlined decision procedures for making emergency decisions with clear lines of responsibility and making emergency decisions temporary, and easily reversible as new knowledge becomes available.
The costs of crisis management can also be reduced by avoiding major
procedural and constitutional reforms during times of crisis.

The advent of crisis does not change the nature of human decision making,
although it does systematically reduce the quality of the decisions made at a
point in time, and through time insofar as the errors of one round of crisis
management may generate subsequent emergencies that have to be dealt with
rapidly. In this manner, completely rational decisions in a crisis setting may
lead to unexpected and undesirable consequences, and thus error detection
and correction should play an important role in every response to crisis.

Entrepreneurial Empowerment: You Are Only as Good as Your Employees, by Desmond Og, 2020

Abstract: As employees are increasingly recognized as an important source of ideas and inspiration, contemporary leadership research finds that the central task of leaders is to empower employees to realize their skills and talents to achieve an organizations’ visions and goals. Drawing on this leadership premise, this study develops the concept of entrepreneurial empowerment (EE). EE has structural and psychological dimensions that empower employees to utilize their knowledge to solve the internal Hayekian knowledge problem. EE introduces an endogenous discovery process in which entrepreneurial leaders play a central role in empowering employees to use their localized knowledge. This entrepreneurial discovery process offers opportunities to adapt and innovate using the knowledge experiences of employees. This study underscores that a venture’s success is not tied to an entrepreneur’s inspirational ideas (or, more broadly, their asymmetric knowledge experiences), but to their ability to inspire ideas from all levels of their business hierarchy.

To succeed in an increasingly complex and changing market environment, ventures can no longer compete on the basis of their leader’s capabilities, knowledge, talents, and vision alone. Ideas to develop new products and services can come from anywhere, from loyal customers, blog spheres, supply chain partners, social media, and above all employees.

Hence, although successful ventures are commonly attributed to an entrepreneur’s ideas, talents, and vision (e.g., Witt 1998, 1999), entrepreneurs today face increasing demands to adapt their ideas to the knowledge experiences of others. This adaption has been widely understood as the Hayekian knowledge problem: the problem of how to utilize knowledge experiences that are broadly distributed among the productive members of society.

Hayek (1945) argued that a single mind, such as that of a centrally planner, cannot offer an adaptation that can utilize this “knowledge of particular circumstance of time and place,” because this knowledge is highly localized to an employees’ experiences. He instead argued that employees are in the best position to utilize this knowledge because their understandings of the special circumstances of their job offered employees or “arbitrageurs” (522) opportunities to exploit local price differentials not known by others. This arbitrage function was later formalized by Israel M. Kirzner’s (1979, 2009, 2019) concept of the alert entrepreneur.

An entrepreneur cannot readily identify their employees’ knowledge, because the entrepreneur’s authority is removed from their employees’ day-to-day experiences. This is consistent with Hayek (1945), who argued that employees are best suited to making decisions on how to allocate their time, resources, and efforts in dealing with their daily operational challenges because employees are most familiar with the circumstances facing them in
carrying out their tasks. Hence, the challenge facing the entrepreneur is that their inability to centralize their employees’ knowledge introduces an internal Hayekian knowledge problem.

The task of the leader, then, is to empower employees to realize their skills
and talents to achieve the organization’s mission and goals. Drawing on this leadership premise, this article develops the concept of entrepreneurial
empowerment (EE). EE involves a leadership task of organizing a firm’s internal decision-making process in which employees are delegated a decision-making authority that advances the entrepreneur’s mission.

The entrepreneur faces a distinct “internal Hayekian knowledge problem” (Elert and Henrekson 2019; Foss 1997). This internal Hayekian knowledge problem involves a use of knowledge in which employees’ knowledge of
the particulars cannot be centralized under the direction of an entrepreneur’s authority. As result, unlike the traditional Hayekian knowledge problem, the internal Hayekian knowledge problem raises a distinct firm-level problem, because the challenges surrounding the centralization of a firm’s distributed knowledge impact a firm’s internal allocation of resources.

In response to this decentralization of decision tasks, Foss, Foss,
and Klein (2007) argue that an entrepreneur’s leadership role
involves organizing the firm’s decision-making authority such that
employees are engaged in a “derived judgment” that acts on behalf
of the entrepreneur’s original judgments. Hence, the challenge surrounding an entrepreneur’s judgment is in organizing a decision-making structure in which employees utilize their knowledge to serve the entrepreneur’s judgment and not their own.

A concept of entrepreneurial empowerment (EE) is proposed. EE appeals to a judgment in which the decision task of the entrepreneurial leader is to institute “structural and psychological” forms of empowerment that encourage employees to draw on their knowledge of the particulars to realize an entrepreneur’s mission or judgment. Specifically, since judgment involves
an ownership stake, the entrepreneurial leader is defined as an individual who has an ownership stake in their business and/or holds a senior leadership position in the organization (i.e., CEO). With this ownership stake, the entrepreneurial leader has the incentive and decision-making power to institute structural and psychological forms of empowerment practices on their employees

We must solve it by some form of decentralization. But this answers only
part of our problem. We need decentralization because only thus can
we ensure that the knowledge of the particular circumstances of time
and place will be promptly used. But the “man on the spot” cannot
decide solely on the basis of his limited but intimate knowledge of the
facts of his immediate surroundings. There still remains the problem
of communicating to him such further information as he needs to fit
his decisions into the whole pattern of changes of the larger economic
system. (524–25; author’s emphasis)

Structural empowerment consists of the communicative systems of a firm’s
internal organization. This communication involves the provision
of “opportunities, information and support” that empower
employees to realize their latent skills and experiences (Spreitzer
2008, 55). Psychological empowerment involves an appeal to the
“man on the spot’s” intrinsic motivations. These intrinsic motivations
involve cultivating a psychological state “in which an individual wishes and feels able to shape his or her work role and context” (Spreitzer 1995, 1444).

Based on a social structural perspective, structural empowerment (SE) is defined by a “sharing power (i.e., formal authority or control over organizational resources (Conger and Kanungo 1988)) through the delegation of responsibility throughout the organizational chain of command” (Spreitzer 2008, 55). To institute this redistribution of authority, structural empowerment (SE) consists of practices that make efforts to develop in employees a greater: 1) autonomy to develop goals, a system of rewards, work procedures, and responsibilities in regard to employees’ assigned job tasks, 2) transparency of information where strategic goals and direction are communicated in ways relevant to their job performance, and 3)
training practices that build their knowledge, skill, and ability to perform their assigned job tasks well (Spreitzer 2008).

Leaders need to communicate to their employees that they have made a
personal commitment to empowering them.

Hayek (1945) writes that “every individual has some advantage over all others in that he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active cooperation” (521–22). Austrians (Cowen and Parker 1997; Hayek 1945; Kirzner 1979, Foss, Foss, and Klein 2007) would argue that an extrinsic reward system would incentivize employees to engage in this active cooperation, to utilize their knowledge of the particulars. Yet various studies find that financial or extrinsic rewards
(i.e., wage rates) can undermine an individual’s intrinsic motivation
(Argyris 1998; Judge et al. 2010; Kuvaas et al. 2017; Ryan and Deci
2000). Judge et al. (2010, 158) explains that extrinsic rewards are ultimately demotivating and dissatisfying to individuals. Because they have a negative effect on intrinsic interest in a task or job, extrinsic motivations tend to undermine perceived autonomy…. Moreover, goals for financial success have been argued to undermine well-being, because these goals represent a controlled orientation that interferes with the fulfillment of more enduring needs such as self-acceptance or affiliation.

The reason is that financial rewards incentivize employees on the
basis of achieving performance goals set by their supervisors and not
on the basis of goals that advance their personal long-term growth
(Judge et al. 2010). Stated differently, extrinsic, financial rewards only
incentivize employees to take on initiatives when financial rewards
are increased (Argyris 1998; Judge et al. 2010) and thus tend to undermine an individual’s autonomy to fulfill their high-order needs.

Austrian economists recognize that decentralization introduces intrafirm learning opportunities that increase an organization’s ability to adapt to and innovate in changing market conditions. These benefits of decentralization stem from the greater autonomy given to an organization’s subunits to engage in local problem-solving behaviors.

To explain this aspect of entrepreneurial leadership, EE exploits the adaptive benefits of decentralization by leveraging the relationship between a firm’s “bounded autonomy” and an employee’s “self-determination” (Siebert, Silver, and Randolph 2004; Spreitzer 2008).

Under a bounded autonomy, employees engage in a self-determination
that exploits the adaptive benefits of decentralization in ways consistent with an entrepreneur’s mission or judgment. Specifically, bounded autonomy reduces the ambiguities surrounding the expectations and scope of an employee’s decision-making authority (Spreitzer 1996). This reduction of
ambiguity is important, because “if people do not know the extent of their authority and what is expected of them, they will hesitate to act (i.e. lack of self-determination) and thus feel unable to make a difference (i.e. lack impact)” (Spreitzer 1996, 487). This reduction of ambiguity offers employees a clear delineation of their decision-making authority, promoting a greater sense of self-determination that avoids the resistance to change typically found in organizational bureaucracies (Spreitzer 1996) by giving employees
greater authority to draw on their knowledge of the particulars to address the challenges and expectations of their jobs.

Empowerment studies find that this broad sharing of information increases an
employee’s sense of meaning and purpose, because employees can see the “big picture” and gain a better understanding of how their job fits within their organization’s broader vision or mission (Siebert, Silver, and Randolph 2004; Spreitzer 1996). Furthermore, studies find that this greater sense of meaning and purpose can increase an employee’s feelings of competence. This competence is important to instituting new ideas and innovations, because it increases employees’ perception that their implemented ideas will succeed and will have a meaningful impact on their organization’s future goals.

Specifically, a broad sharing of an entrepreneur’s vision offers employees a greater context in which to understand how their knowledge of the particulars can help realize an entrepreneur’s vision. This communication is important, because an employee who fails to understand how their knowledge of the particulars fits within the entrepreneur’s vision can create coordination problems.

This shared understanding is consistent with the communicative aspects of Hayek’s (1945) decentralization which posits that an employee’s knowledge
of the particulars need to be understood within the context of a larger information system (see also Witt 1998). However, since Hayek (1945) relies on the price system to communicate the goals of this larger system, he does not consider those communication systems that appeal to an employee’s intrinsic motivations. EE addresses this shortcoming. An EE involving the broad sharing of an entrepreneur’s vision with all members of their organization (such as Gutierrez’s strategy at Kellogg’s), psychologically empowers an employee’s feeling of competence. This empowerment occurs,
because a shared understanding aligns an employee’s knowledge of the particulars with their entrepreneur’s vision (Witt 1998) and thus increases an employee’s feelings of competence — that their knowledge of the particulars can have an impact in realizing the entrepreneur’s vision. This competence energizes an employee’s creativity to utilize their knowledge of particulars to develop new ideas in their jobs.

Unlike with Kirzner (2019), the structural and psychological dimensions of
EE involve a search that requires a deliberate commitment of an that the entrepreneur institute practices that provide employees the opportunity, information and support to realize their latent potential. As these policies involve redistributing the power in an organization’s hierarchy, supervisory members of this hierarchy are likely to resist such policies, because they undermine their position of power and influence (Argyris 1998; Bendahan et al. 2015). Hence, an entrepreneur who institutes such SE policies is likely to expend considerable time and effort in overcoming this resistance.

Stated differently, EE argues for a Friedman system of ethics (see also Bylund 2019, Kirzner 2019) that justifies an entrepreneur’s wealth on the basis that they have contributed resources in empowering their factors of production
(i.e., employees). Hence unlike Kirzner’s (2019) rejection of Friedman’s system of ethics, EE argues that entrepreneurs have a legitimate moral claim to the wealth creation process, because this wealth creation is based on an entrepreneur developing a deliberate relationship to their factors of productions (see also Bylund 2016).