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1 Utility Players and Utility Functions Benjamin Campbell, Ohio State University David Kryscynski, Brigham Young University Russ Coff, Wisconsin School of Business Slide 2 2 Utility Players and Utility Functions Unique capabilities drive heterogeneous performance these, in turn, draw on Firm-Specific human capital (FSHC) and knowledge. Shared rents (bilateral monopoly w/firm & worker) Specificity: Skills are more valuable in one firm Gap between opportunity cost and use value at that firm Firm may capture rent beyond the opportunity cost Investment problem in FSHC. Employee reluctance to incur direct & opportunity costs Holdup hazard: Gains must justify the investment Slide 3 3 Utility Players and Utility Functions Firm-Specific value created: Hometown status increases player popularity & revenue: For Carmelo Anthonys 1 st game w/his hometown NY Knicks StubHub ticket prices tripled. Gap between opportunity cost (other teams) & use value FSHC? Is it a skill? Its firm-specific & embedded in people Bi-lateral monopoly: Rent is shared. H1a: Stars earn more on moving to their home state H1b: Stars earn less on moving from their home state H1c: Stars earn more when staying in their home state Slide 4 4 Utility Players and Utility Functions Slide 5 5 Compensating wage differentials: Undesirable work commands a wage premium Preferred work may be linked to lower wages FSHC can have positive utility A firms mission, culture, or the work itself may be valued Obtaining FSHC can be enjoyable (social networks, etc.) This is part of the value employees can appropriate Appropriation by the firm. More financial value arising from FSHC flows to the firm (or other stakeholders in the firm). Slide 6 6 Utility Players and Utility Functions I'll be able to afford what I want. But not too many things excite me, except winning and being around my family -Derrick Rose (Bulls), December 2011 "That's like the ultimate dream at the end of the day. Who wouldn't want to go back home to play?" -Carmelo Anthony (Knicks), January 2011 I'll be able to afford what I want. But not too many things excite me, except winning and being around my family -Derrick Rose (Bulls), December 2011 "That's like the ultimate dream at the end of the day. Who wouldn't want to go back home to play?" -Carmelo Anthony (Knicks), January 2011 Slide 7 7 Utility Players and Utility Functions Firm-Specific utility created: Heroes enjoy status and visibility Live near friends and family Other firms cannot provide this source of utility Compensating differentials: Substitution between wages & utility. H2a: Players take lower wages to move to their home state H2b: Players require a wage premium to move from their home state H2c: Players take lower wages to stay in their home state Slide 8 8 Utility Players and Utility Functions Positive utility. Players prefer to play on a winning team. But, utility and skills are not firm-specific. Derrick Rose (earlier) Lebron James move to Miami taking a $15M pay cut. Compensating differentials. Does positive utility allow owners to appropriate more financial returns? H3a: Players accept wage discounts to move to a playoff bound team. H3b: Players require a premium to move to a team thats not playoff bound. H3c: Players accept wage discounts to stay at a playoff bound team. Slide 9 9 Utility Players and Utility Functions Sample: 626 NBA players 2000-2009 (2234 player-yrs) DV: Rent = salary (e.g., opportunity cost) Independent variables: Homeward move: ToHome=arriving hero, FromHome=leaving hero. Playoff move: ToPlayoff=better team, FromPlayoff= worse team. Stay in a good situation: StayHome, StayPlayoff Star (starts over of the games) (n=367) Controls: Lagged salary Person/team fixed effects Mobility (baseline effect) Age, Age 2 Offensive/defensive rating Year Minutes played Position Slide 10 10 Utility Players and Utility Functions a Fixed effects panel regression. Significant controls : Year/team dummies, team value, lagged salary, minutes played, rating, age. VariablePredictedFinding Move Move*Star ToHome*StarH1a: FromHome*Star H1b: StayHome*StarH1c: ToHome H2a: FromHomeH2b: StayHome H2c: ToPlayoff H3a: FromPlayoffH3b: StayPlayoff H3c: Slide 11 11 Utility Players and Utility Functions Fixed/random effects. Stronger findings for random effects. Pay reduction for moving away from a playoff team (might be involuntary) Cutoffs to define stars. Games started, Minutes played, Efficiency rating. Winning results are more robust. Wage . Similar results for annual salary change. Do moves alter performance? Not generally. Moving to a playoff team increases performance but average pay is lower for such moves. Slide 12 12 Utility Players and Utility Functions Good moves for less money. Lower pay for moves that increase utility (home & winners). Staying power. Stars appropriate hometown value over time. Winners share the rent over time. Strategy for the next game: A theory of rent must incorporate utility How do firms manage utility/pay tradeoffs? When do workers realize both financial & non-financial returns? (scarcity? temporal specificity? Fairness?) Slide 13 13 Utility Players and Utility Functions Slide 14 14 Management Dilemmas Opportunism/moral hazard Turnover Knowledge mgt Rent Appropriation Bargaining power Social capital Insider trading Strategic Factor Markets Adverse selection/Lemons Opportunism/bidding wars Uncertain complementarities Ambiguous Property Rights Information Asymmetries X X Sustained Firm Performance Knowledge-Based Assets Firm-specificity Causal ambiguity Social complexity Slide 15 15 Utility Players and Utility Functions Unique capabilities drive heterogeneous performance these, in turn, draw on Firm-Specific human capital (FSHC) and knowledge. Shared rents (bilateral monopoly w/firm & worker) Specificity: Skills are more valuable in one firm Gap between opportunity cost and use value at that firm Firm may capture rent beyond the opportunity cost Investment problem in FSHC. Employee reluctance to incur direct & opportunity costs Holdup hazard: Gains must justify the investment Slide 16 16 Utility Players and Utility Functions Misleading theory? FSHC doesnt affect factor markets as predicted. Investments in FSHC signal a rare ability/willingness to acquire new FSHC at another employer. Coarse signals: Education obscures FSHC (Berg, 03); Previous employers success halo (Apple/Google). Heterogeneous value of GHC: Complementary assets compensate for devalued FSHC. What now? Nature of HC-based advantages? As investment cost drops, individuals require less to justify investment (ROI) firm captures more. *Campbell, Coff & Kryscynski (AMR, 2012) Slide 17 17 Utility Players and Utility Functions Lowest threat Rivals must compensate for lost utility & value of FSHC Lowest threat Rivals must compensate for lost utility & value of FSHC Highest threat Rivals offer greater utility & devalued FSHC is a non-issue Highest threat Rivals offer greater utility & devalued FSHC is a non-issue Low threat Rivals must compensate for the value of lost utility Low threat Rivals must compensate for the value of lost utility High threat Rivals added utility compensates for devalued FSHC High threat Rivals added utility compensates for devalued FSHC FS Human Assets High Low Happier @ firm Happier @ rivals FS Utility