The Hidden Costs of Choice in the Labor Market

Pak Hung Au (), King King Li (), Qing Zhang () and Rong Zhu
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Pak Hung Au: Hong Kong University of Science & Technology
King King Li: Shenzhen University
Qing Zhang: Hunan University

No 16623, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: Freedom of choice is often thought to improve efficiency. We experimentally investigate the effect of giving workers a choice between compensation schemes with and without a CSR component (CSR/NoCSR) on labor market participation decision and work performance, compared to the alternative of exogenous assignment. Classical economic theory suggests that giving workers a choice should not reduce their performance. Our results show that there are hidden costs associated with the right of choice. When a worker is allowed to choose his or her compensation scheme, the labor market participation rate is significantly lower than when the same scheme is exogenously assigned. Work quality is also significantly lower for those who choose CSR, as well as for those who choose no CSR, than for those who are exogenously assigned to the same scheme.We propose a model of signaling with image concerns to explain why the freedom of choice may induce reduced participation and effort exertion of workers.

Keywords: choice; signaling; image concerns; corporate social responsibility; labor; experiment (search for similar items in EconPapers)
JEL-codes: C9 J01 M14 M52 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2023-11
New Economics Papers: this item is included in nep-exp, nep-hrm and nep-lab
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