Three essays in productivity and earnings

Abstract

This dissertation revolves around the study of worker productivity and earnings. Chapters 1 and 3 revolve around the study of incentives for employee performance. Specifically, I look to understand how two contract elements impact employee effort. Using the context of the Major League Baseball (MLB) player market, the first chapter looks at how multi-year contracts impact player performance. Because salary is guaranteed, players with multiple years remaining on their contracts may not have sufficient incentive to perform at a high level because the next contracts the players will sign are far off into the future. The third chapter focuses on a related contract component, contract options. If a contract has an option, that option lays out terms for an additional year of contract that may become guaranteed at the discretion of one or both parties to the agreement. When a player's contract has a club option, this may disincentivize player effort because the player cannot fully reap the benefits of high performance during the guaranteed years of the contract and receives a buyout if the option is not exercised. The second chapter looks to understand how a specific choice made within college, the choice to double major, subsequently impacts earnings. Human capital theory would suggest that completing a second major would improve worker productivity, which should subsequently increase earnings. Signaling or sorting models would suggest that if completing a double major conveys information to an employer about a student, possibly that he or she is of high ability or exerts high effort, the double major should increase earnings. Chapter 1 uses MLB data to examine the relationship between years remaining on player contracts and player performance. There is a potential for moral hazard to arise in this principal-agent relationship as the player may choose a less than optimal level of effort from the perspective of the team when the player has many guaranteed years remaining. A player fixed-effects estimation strategy is employed which finds a negative, significant relationship between years remaining and performance. The primary contribution of this work is to show that this relationship is due to shirking. Alternative explanations for this relationship, that teams sign improving players to multi-year contracts or players face an adjustment process when joining a new team, are addressed. Additional evidence shows that shirking occurs on offense, not defense, and for position players, not pitchers. Chapter 2 primarily uses American Community Survey data to estimate the returns to a double major. Consistent with past studies, this study finds a positive return on earnings for double majors, at a magnitude of around four percent, but cautions that these results are not necessarily causal. This return is then unpacked along multiple dimensions. Around twenty-five percent of the return can be attributed to an increased likelihood of completing a degree beyond a bachelor's degree. Double majoring increases the likelihood of completing a graduate or professional degree by around fifteen percent. The return to double majoring on earnings varies considerably by field of second degree. Holding first major constant, a second major in education leads to a fall in earnings of 5.8 percent, which is likely due to selection into teaching, while a second major in engineering leads to a return of 8.5 percent. This return also varies considerably by major pairings. Notably, pairing an engineering major with a major in the social sciences leads to a considerable return on earnings of between eighteen and twenty-five percent relative to a single major in either field. The return first increases then subsequently decreases with age, is near ten percent for Asian college graduates, is around three percent for black and white college graduates, and is nearly identical for men and women. Chapter 3 looks to understand if the inclusion of optional years on MLB player contracts impacts player performance. Contract options are a feature included in about thirteen percent of new contracts given to batters from the years 2009 to 2017. There are four common types of option: club, mutual, player, and vesting. How an option affects incentives for player effort will likely depend on the type of option. It is likely that effort will be disincentivized when the team has the final decision on whether to exercise the option, which is the case with club options. This prediction is tested empirically, and the empirical results suggest that having a club or vesting option leads to diminished performance by players.