Economists use data to answer questions about labor markets, firms, and the like. A trendy way to study these issues is to run “experiments” where economists go into firms or other locations and try to conduct the economic equivalent of medical researchers that test drugs on “treatment” and “control” groups. We like these sorts of experiments because we are interested in what they tell us about economic theory or other social science phenomena. But business owners sometimes stand to gain much more because experiments can be used to uncover profitable opportunities.
|Who picked this, how much were they paid, and did they make enemies in the process?|
Here’s one example of a recent experiment where some economists learned something and so did a small business owner. Economists Oriana Bandiera, Iwan Barankay, and Imran Rasul have actually run a series of experiments over the course of a few years on a farm in the United Kingdom. One of those experiments looked at whether or not managers would sell out their friends (for anyone interested in the full research paper, click here.) On this farm, there are workers who pick fruit all day and then there are other workers who manage the pickers. The managers typically have friends who are workers and vice-versa because they all live together (for the picking season) on the farm. The managers watch over the pickers and they also enable them by, among other things, making sure their baskets are emptied and assigning them to an area with plenty of fruit. Managers help everyone but they have some discretion to help the employees they like best by assigning them to fruitier areas, emptying their baskets faster, and the like.
The three economists looked at data for fruit pickers over a long period of time during which the fruit pickers were paid by the bushel of fruit they picked while the managers were paid an hourly wage to watch over them. They were able to show that fruit pickers are more productive on the days they work for managers with whom they are friends. That is, suppose Andrea and Brenda are managers (most of the managers on the farm are women) while Carl is a fruit picker who is a friend of Andrea’s but not of Brenda. On the days Carl gets assigned to work for Andrea, he picks more fruit, presumably because Andrea helps him more than Brenda helps him.
The economists and the farm shook things up after a while, though, by paying the managers based on how much fruit got picked while they were on duty (in addition to the hourly wage.) Now both the pickers and the managers had incentives to produce more fruit.
So what happened? The managers sold out their friends! Instead of giving their friends the better assignments, the managers gave the best pickers the best assignments. Total production went up and the managers made more money. A cynic would say that the farm bribed the managers to be less cooperative with their friends but a much more positive way to interpret this is that the managerial incentives aligned the interests of the farm, the managers, and the pickers themselves.
The experiment gave the farm useful insight into how to motivate their managers. That doesn’t mean these incentives were necessarily a good idea, especially in the long run. Breaking up friendships and driving managers harder can have negative ramifications. But the farm learned a lot, from this and other experiments, about what drove their employees to be more or less productive.
What experiments should you run at your small business? It’s hard to generalize. But here are three basic principles to keep in mind. First, choose something where you can generate enough data and examples to draw reliable conclusions (in statistician-speak, make sure your “sample size” is big enough.) Second, carefully craft things so you have a reliable “control” group – for example, if you try some sort of price promotion as an experiment, make sure you do it at random and varied times so you can reliably compare it to when you do not run the promotion. And finally, focus on things that really matter in your business. Getting incentives right for fruit pickers is VERY important if you run a fruit farm but a lot of other businesses should be running experiments on pricing, opening hours, advertising, and other things that potentially “move the needle” of growth or profitability.
And if you like this idea but you don’t know where to get started, get a conversation with us (in the comment box below) and others going. Who knows – maybe your successful business experiment will be our next academic paper?