Do Firms Have Short Memories?

Andrew Healy
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Andrew Healy: Loyola Marymount University, ahealy@lmu.edu

Journal of Sports Economics, 2008, vol. 9, issue 4, 407-424

Abstract: When deciding what salary to offer an employee, a firm needs to predict that employee's future productivity. One piece of information that a firm can use to predict productivity is the employee's past performance record. Classical theory predicts that firms will effectively use the available information to choose an appropriate salary offer. Evidence from baseball contracts indicates, however, that memory-based biases influence salary offers. Consistent with insights from psychology and behavioral economics, salaries are affected too much by recent performance compared with past performance. All organizations do not suffer equally from short memories. The teams that achieve the most with the money that they spend also use past performance data most effectively.

Keywords: limited memory; wages; baseball (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:sae:jospec:v:9:y:2008:i:4:p:407-424

DOI: 10.1177/1527002507310440

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