Managerial Attention and Worker Engagement

We study a dynamic agency problem with two-sided moral hazard: the worker chooses whether to exert effort or shirk; the manager chooses whether to invest in an attention technology to recognize worker performance. In equilibrium the worker uses past recognition to infer managerial attention. An engagement trap arises: absent recent recognition, both worker effort and managerial investment decrease, making a return to high productivity less likely as time passes. In a sample of ex-ante identical firms, firm performance, managerial quality, and worker engagement display heterogeneity across firms, positive correlation, and persistence over time. ∗We thank Dirk Bergemann, Simon Board, Patrick Bolton, Alessandro Bonatti, Sylvain Chassang, Wouter Dessein, Marco Di Maggio, Bob Gibbons, Ricard Gil, Chris Harris, Ben Hermalin, Johannes Hörner, Michael Magill, Jim Malcomson, David Martimort, Niko Matouschek, Meg Meyer, Daniel Rappoport, Steve Tadelis, seminar participants at Johns Hopkins, Mannheim, Munich, Oxford, Pittsburgh, PSE-Roy seminar, UCLA, USC, Warwick, and Yale and participants at the 2013 NBER Organizational Economics meeting and the 2014 Toronto Conference on the Economics of Markets and Organizations for helpful comments. †Columbia University and University of Warwick. Email: [email protected]. ‡Columbia University. Email: [email protected]. Performance differences across firms are sizable and persistent. A growing number of studies point to managerial practices as a main driver. Bloom and Van Reenen (2007) find that higher-quality management practices are associated with higher productivity, profitability, and survival rates. Different components of management are stressed in Hansen and Wernerfelt (1989), Ichniowski, Shaw, and Prennushi (1997), Bloom and Van Reenen (2010), Kaplan, Klebanov, and Sorensen (2012), and Bloom et al. (2013); see Gibbons and Henderson (2013) for a survey. A managerial practice can be seen as a form of technology (Bloom, Sadun, and Van Reenen, 2012), and as such as an intangible asset that is subject to depreciation and in which the firm can invest. The value of this asset however is difficult to observe directly, as is evident from the ongoing efforts of the economics profession to measure management quality. A large part of managerial practices relates to human resource management, and in particular to the firm’s ability to define, identify, document, and reward worker performance. At the same time, psychologists find that worker engagement is important for firm productivity. Employee engagement is positively related to individual performance (Warr, 1999; Judge et al., 2001); moreover, at the organizational and unit-business level, there is a significant link between aggregate measures of engagement and outcomes such as employee turnover, customer satisfaction, accidents, productivity, and profits (Ostroff, 1992; Ryan, Schmit, and Johnson, 1996; Harter, Hayes, and Schmidt, 2002). Notably, some of the items comprising engagement measures concern workers’ perceptions of human resource management practices. For example, whether workers believe that they are given “recognition or praise for doing good work” affects their engagement (Harter, Hayes, and Schmidt, 2002, p. 269). This paper studies firms’ ability to raise productivity by using better human resource management practices and increasing worker engagement. What drives investment in the managerial practice — a costly, intangible, and imperfectly observable asset? How is worker engagement, and hence effort and productivity, See Syverson (2011) for a discussion of the different determinants of firm productivity. Investment in the management technology is not limited to financial resources. Corporate leaders may need to devote more time to internal management (Bandiera et al., 2011). Recent work suggests that this link is indeed a causal one from worker engagement to firm performance; see for example Bockerman and Ilmakunnas (2012).