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The Hidden Costs of Choice in the Labor Market

Author

Listed:
  • Au, Pak Hung

    (Hong Kong University of Science & Technology)

  • Li, King King

    (Shenzhen University)

  • Zhang, Qing

    (Hunan University)

  • Zhu, Rong

    (Flinders University)

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.

Suggested Citation

  • Au, Pak Hung & Li, King King & Zhang, Qing & Zhu, Rong, 2023. "The Hidden Costs of Choice in the Labor Market," IZA Discussion Papers 16623, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp16623
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    References listed on IDEAS

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    More about this item

    Keywords

    choice; signaling; image concerns; corporate social responsibility; labor; experiment;
    All these keywords.

    JEL classification:

    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • J01 - Labor and Demographic Economics - - General - - - Labor Economics: General
    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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