The Economics of Creed Bratton:

What Can Teach Us About The Nature of Work, Workers, and Wages

Rewatching The Office, I once again received immense comedic utility from Creed Bratton’s beautifully chaotic handling of Dunder Mifflin Paper Company, Inc. as temporary Regional Manager. “NEW MGR”, “B.O.B.O.D.D.Y.” and “Biznus” are artistic masterstrokes, but what exactly does all this have to do with economics?

Despite being the longest-serving employee of the company, Creed is an almost utterly incompetent and shirking office worker. When seen at his desk, he is usually playing spider solitaire or chewing on mung beans. From a real-world business management point of view, such individuals can be described as “productivity blackholes” whose labor output doesn’t match the salary invested in them. While it is easy to dismiss Creed as a hyperbolic caricature of a modern-day worker, it is actually the perfect starting point in the field of labor economics that analyses the moral hazards and social behaviours associated with information asymmetries that exist at the start of any labor contract.

The theory assumes that a prospective employee has great interest in hiding their true level of effort while working, until after the contract is signed. This results in an informational asymmetry that disadvantages the employer. Assume both behave selfishly and choose actions that maximise their self-utility. For the employee, emulating Creed would be best when the employer has no monitoring device and thus no way to punish (either financially or reputationally) them for less than desired work effort. For the employer, on the other hand, being a Big Brother –knowing exactly how productive each and every employee is at any given moment – would be best so that it could unilaterally fine the employee for unsatisfactory effort.

However, this theoretical starting point does not reflect reality at all. Consider the flipside risks if all employees and employers acted in the manner above:

1) productivity growth, and consequently economic growth, would halt;

2) trust would not exist in the employee-employer relationship, substantially fracturing the social-economic fabric;

3) employees put in too little effort at work such that even without a monitoring device the employer would find out, and the employee may be facing an extremely costly termination; and

4) employers deploy too much resources - time, money, and personnel - to monitoring mechanisms (not to mention the legal complaints from employees concerning potential breaches of privacy), and the employers may face unjustifiable cost overruns.

How then, does the trade-off between the polar desires of employees and employers work in reality? Labor economists have integrated game theory, specifically sequential gift-exchange games, to build a more realistic model of these interactions. These games randomly pair a giver and a receiver, then alternating across multiple rounds, where the giver can choose to give some or all of their points to the receiver. The receiver can then choose to keep it, or return some or all of it to the giver.

Sound familiar? That’s because in the employment relationship, the giver can be thought of as the employer and the receiver as the employee who has the choice of how much effort to reciprocate. So, does it matter how much money and/ or other non-financial perks are given initially? Numerous papers, especially by Ernst Fehr, in the 1990s confirmed that yes, of course it matters! Through the aforementioned sequential games, these economists demonstrated evidence of a positive correlation between actual level of employee effort and the level of the offered wage. In other words, as the initial wage offered rises, the employees reciprocate with progressively higher levels of actual effort once the job starts.

So why is this correlation happening? Fehr, and others, posit two reasons. First, employees’ behaviours are conditioned by a social norms; such as the norm that high employee effort results in a future promotion, or the norm in certain cultures (“the Protestant work ethic”, for example) that a task should not be shirked. Second, and more well-known, is the concept of "effort reciprocity" or “fair exchange” which posits that workers will adjust their effort levels based on how fairly they believe the employer is treating them. Of course, the reverse also applies, where employers reward based on perceived employee performance.

How then does all this theory translate to practical tips for how employers can get the best out of their employees? Are there any other options for a company beyond advertising a higher wage than its competitors in the hope it will attract innately harder working employees? These studies show that the answer lies in bonus structures. If the employer has no ability to monitor actual levels of effort, even with a higher starting wage, 83% of workers will still put in less than the desired level of effort, while only 2% of workers will voluntarily put in more effort than the desired level. However, this changes drastically when the employer is allowed to punish or reward employees via fines or bonuses: 37.5% of employees now voluntarily put in more effort than the desired level, while only around 26% still put in less effort than desired. In sum, the actual level of effort provided depends on the employee’s expectations regarding punishment or reward. Little wonder why virtually all major corporations in finance, consulting, IT, and banking have compensation structures that rely heavily on bonuses.

So, the next time you watch The Office, know that there is an empirically tested reason why Creed Bratton seems like a ridiculous caricature - it is because he is. Such workers who act with purely selfish motivations simply do not exist in our society. The pressure of societal norms prevent that to a certain extent. More pertinently, the pressure of reciprocating what seems to be a fair offer of wage or treatment, seems to be the driving factor. As for those who run a business, it helps to know that implementing a punishment and reward bonus structure in the compensation section of an employment contract can help improve the company’s output. It's pretty simple biznus, really.