Monday, February 8, 2016

Competitiveness and Wages of MBA's

This is a paper I always wanted to write:

Reuben, E., P. Sapienza, and L. Zingales: "Taste for competition and the gender gap among young business professionals,"

There are two reasons I find this work interesting: First, it related to a literature that helps understand what psychological traits are linked to labor market outcomes. Second, it shows the external relevance of competitiveness: see also my paper with Thomas Buser and Hessel Oosterbeek:  Gender, Competitiveness and Career Choices,” Quarterly Journal of Economics, August 2014, 129 (3): 1409-1447, and see also my former blogposts  here and here)

The abstract reads:

"Using an incentivized measure of individuals’ taste for competition, this paper investigates whether this taste explains subsequent gender differences in earnings and industry choice in a sample of high ability MBA graduates. We find that “competitive” individuals earn 9% more than their less competitive counterparts do. Moreover, gender differences in taste for competition explain around 10% of the overall gender gap. We also find that competitive individuals are more likely to work in high-paying industries nine years later, which suggests that the relation between taste for competition and earnings persists in the long run. Lastly, we find that the effect of taste for competition emerges over time when MBAs and firms interact with each other."

Their main results can be seen in the following figures and tables:
First even among MBA's it seems there is a gender gap in tournament entry.

While risk aversion and confidence can account for some of that gender gap in tournament entry, a substantial gender gap remains.

Second, male MBA's have a higher salary after graduation than female MBA's.

Now, to assess the external relevance of competitiveness:

Competitiveness is highly positively correlated with higher earnings.

Finally, competitiveness remains an important variable even controlling for gender, and can account for about 10% of the gender gap in earnings.

They write:
"How important is the role of taste for competition in accounting for the gender gap in earnings? One way to answer this question is to compare the impact of taste for competition on the gender coefficient to the impact of other control variables on the same coefficient. This can be done by looking at column III, which includes all the variables in Table 1 except for the choice of tournament. Including these control variables noticeability reduces the gender gap by 20.7% (the gender coefficient changes from–0.122 to –0.097). This result puts the effect of taste for competition in perspective. Namely, the single experimental measure of taste for competition explains around half as much of the gender gap in earnings as a rich set of variables that include demographic characteristics, academic performance, and experimental and survey measures of important psychological attributes."

Finally, they have a great section to address to what extent competitiveness is really distinct from risk aversion: They write the following:

"Taste for competition and the choice of tournament

A clever feature of the experimental design of Niederle and Vesterlund (2007) is that participants make two choices between tournament and piece-rate. In one case, participants perform under the chosen payment scheme while in the other case the payment scheme is simply applied to their past performance (see section 3.1). We will refer to the choice of the tournament in the latter case as “uncompetitive tournament choice.” Because it does not include performing in a competitive environment, Niederle and Vesterlund (2007) argue that the choice between piece-rate and uncompetitive tournament is unaffected by the participants’ attitudes towards competition. If this is the case and the association between earnings and choosing the tournament is driven by taste for competition, then we should observe a weaker relation between earnings and uncompetitive tournament.

To evaluate whether choosing uncompetitive tournament is associated with earnings, we run regressions like the ones reported in columns II and IV of Table 3. In some regressions, we simply substitute tournament with uncompetitive tournament. We find that the coefficients for uncompetitive tournament are positive, but they are not statistically significant and they are half as large as the comparable coefficient in Table 3. In addition, the change in the gender coefficient due to the inclusion of uncompetitive tournament is much smaller and is not statistically significant. In other regressions, we include both tournament and uncompetitive tournament. We find that the coefficient for tournament is both economically and statistically significant whereas the coefficient for uncompetitive tournament is close to zero and far from statistical significance. These results provide compelling evidence that the association between tournament and earnings is indeed driven by the participants’ attitudes towards competition and is not related to the choice of a tournament per se."