The Selection and Incentive Effects of Equal-Sharing

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Incentive theory predicts that more equal sharing (pay less sensitive to performance) provides insurance but discourages participation of high-ability individuals and encourages free-riding. Yet, evaluating the empirical relevance of these predictions has been challenging, mainly due to data limitation. This proposed research will take a step towards filling this gap by analyzing unique data sets that are especially suited to test the selection and incentive effects of equal-sharing. The data contain rich panel information on both individuals and Kibbutzim (plural of Kibbutz), which are communities that have recently shifted non-uniformly from an equal-sharing scheme to pay-for-performance.Broadly, the three proposed projects will contribute to incentive theory, which is at the heart of economics. The first project tests whether equal-sharing discourages participation of high-ability workers. It analyzes exit from and entry to Kibbutzim with a unique panel data of individuals linked across population censuses. The second project provides a unique empirical analysis of the free-rider problem by testing whether and to what extent equal-sharing leads to free riding behavior in the decisions of hours worked, absenteeism from work and fertility. To do so, this project merges individual-level Labor Force Surveys, which are conducted annually and contain information on these decisions, with a unique Kibbutz-level data set constructed through archival work. The project performs difference-in-difference analysis to test whether members in Kibbutzim that shifted away from full equal-sharing during the sample period worked longer hours, reduced absenteeism and reduced fertility. The third project tests the factors mitigating the trade-off between insurance and participation. A simple model of the Kibbutz as an insurance device facing participation constraints is considered and confronted with the data. The empirical test evaluates the relative importance of factors highlighted by the model vs. ideological factors highlighted by sociologists in determining the degree of equal-sharing and in mitigating negative selection.BROADER IMPACT: This research contributes to our understanding of organizations that are subject to negative selection. Among these are professional partnerships, cooperatives, and labor managed firms, which are often based on revenue-sharing. For example, in professional partnerships such as law firms, just like as Kibbutzim, high-ability partners are expected to exit to earn a wage premium for their ability outside of the partnership. Second, this research will be among the first to test using individual-level data a well-known yet widely-disputed hypothesis, which has implications regarding immigration policy. This hypothesis, known as Borjas'' selection hypothesis, postulates a positive self-selection of migrants when the country of origin has a more equal earnings distribution than the destination, while a negative self-selection is expected when the country of origin has a more unequal earnings distribution. If it holds empirically, this hypothesis implies that immigrants from more equal origins are more likely to be of high quality. Third, by evaluating the extent to which individuals free ride at the workplace, this project sheds light on the usefulness of unemployment benefit programs. Also, by evaluating the effect on fertility of an extreme change in fertility incentives, this project contributes to our understanding of the usefulness of programs designed to encourage fertility, an issue that is subject to policy debates in Europe. Last, Kibbutzim present a puzzle for economists as economic theory predicts that communities based on equal-sharing are likely to unravel due to moral hazard and adverse selection. Yet, unlike many other communes in history, Kibbutzim have persisted successfully for most of the 20th century and formed one of the largest communal movements in history, consisting today of 120,000 members living in 268 Kibbutzim. This research will shed light on this puzzle by analyzing the factors that allow Kibbutzim to coexist within a capitalist environment and evaluating the role of economic factors in organizations often claimed to be driven by ideology.