Econ 152, Winter 2025
Week 4 Practice Questions
In Ed Lazear’s study of Safelite’s PPP plan, the author shows that two concerns may arise when trying to determine the effects of introducing a new wage schedule on employee productivity.
These confounders include seasonal variation in productivity and changes in productivity due to the hiring of new workers who have different productivity relative to the current workforce.
• ln(Qij): the logged productivity
• PPP ij : an indicator variable that equals 1for worker i in time j that has the option to choose the PPP plan, and 0 if they do not have this option
• Mij : a set of 12 month indicator variables, one for each month
• Yj : an indicator for whether the observation is from the first or second year
• Wi : a set of worker fixed effects
Below are a set of models of the logged productivity as a function of the availability of the PPP plan. In all models, β approximately represents the effect of the PPP plan on productivity, in percentage terms. However, the estimated effect may be biased due to confounders.
a. ln(Qij) = a + β 1∙PPP ij+ εij
b. ln(Qij) = β2∙PPP ij + Mij + Yij+ εij
c. ln(Qij) = β3∙PPP ij + Wi + εij
d. ln(Qij) = β4∙PPP ij + Mij + Yij + Wi + εij
1. If we want to isolate the effect the PPP plan on productivity due to an increase in within-
worker productivity, which of the following would provide us with the best estimate:
a.
b.
c.
d.
e.
2. If we want to isolate the effect the PPP plan on productivity due to selection effects of new workers, which of the following would provide us with the best estimate:
a.
b.
c.
d. −
e. −
3. If we want to isolate the effect the PPP plan on productivity due to the timing of the plan’s rollout, which of the following would provide us with the best estimate:
a.
b.
c.
d. −
e. −
4. Using a diagram, explain why we expect Safelite’s PPP plan to increase the variance of output across workers.
5. Using a diagram, explain why we expect Safelite’s PPP plan to raise the utility of high-ability workers without changing the utility of low-ability workers.
6. Using a diagram, explain why high-ability workers are more likely to have flatter indifference curves, and low-ability workers more likely to have steeper indifference curves
7. In their “Legos” experiment, Ariely et al. estimated that the intrinsic value of ‘meaningful’ work had a motivational effect equivalent to a 39 percent wage increase. Using a diagram, describe how they came up with this number.
8. Daedalus and his colleagues at the University of Troy did a study of the value of meaningful work that was very similar to Ariely et al.’s Legos study. But instead of offering a declining marginal rewards schedule ($2.00for the first Bionicle, $1.89for the second, etc.) Daedalus et al.paid their subjects $2.00for every Bionicle they produced, as indicated by the red Marginal Pay per Bionicle line in the Figure below.
The authors found that their subjects produced an average of 8 Bionicles in the Meaningful condition and 4 Bionicles in the Sisyphus condition.
Daedalus et al. propose that the behavior. of their subjects can be explained by the two marginal- cost-of-effort curves shown as straight blue lines in the diagram below. Notice that the marginal disutility of effort is negative for the first three Bionicles produced under the Meaningful condition.
For each of the following statements about the Figure, state whether it is TRUE or FALSE:
a) The Vʹ(B) schedule for the Meaningful condition implies that subjects were irrational: It does
not make sense to have a negative cost of effort.
b) According to the Figure, if the experimenters had paid $4 instead of $2 per Bionicle, the subjects would have produced 4 Bionicles under the Sisyphus condition.
c) According to the Figure, if the experimenters had paid $3 instead of $2 per Bionicle, the subjects would have produced 6 Bionicles under the Sisyphus condition.
d) These subjects were behaving as though the disutility of producing one more Bionicle was 2 dollars greater in the Sisyphus condition than in the meaningful condition. In other words, the value of meaningful work to the subjects was two dollars per Bionicle.
e) The horizontal distance c-a = d-b measures the dollar value of meaningful work for an experimental subject with these Vʹ(B) curves.
f) According to the Figure, a typical experimental subject would have produced 3 Bionicles for free if he was allowed to produce them in the Meaningful condition.