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Daniel Keum discusses moral cost as a novel behavioral constraint on firm resource adjustment, specifically layoff decisions that can cause severe harm to employees

Image courtesy of interviewee. January 31, 2024

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This video video discusses the profound impact of job loss on individuals and society, highlighting that losing a job can lead to severe emotional and health consequences. The presenter notes that job loss often becomes a defining feature of one's identity, leading to challenges in coping with unemployment, especially for those living paycheck to paycheck.

The presentation further explores a critical but often overlooked aspect of Corporate Social Responsibility (CSR), focusing on how CEOs make decisions about layoffs. It suggests that while many CEOs may feel moral obligations to retain employees, there are factors like government-provided unemployment benefits that can influence their decisions, leading to an increase in layoffs due to the perceived moral leeway granted by such support.

Research findings indicate that while some executives are naturally prosocial and care about their employees, the presence of social safety nets can lead to more aggressive downsizing because these initiatives reduce the moral cost associated with layoffs. The presenter emphasizes that societal perceptions of CEOs have shifted over time, often viewing them as self-serving rather than altruistic.

Additionally, the text argues for a reevaluation of the role of social safety nets. While there is a common argument that increased benefits may encourage laziness among workers, the presenter counters that an effective safety net can actually facilitate necessary layoffs by allowing CEOs to act without the weight of moral guilt.

The discussion includes diverse aspects of CEO behavior, corporate governance, and the economic implications of social insurance programs, advocating for a more nuanced understanding of ethical decision-making in the corporate environment. The ultimate goal is to foster a constructive dialogue around the responsibilities of corporate leaders and the frameworks that shape their decisions.

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00:00.185 --> 00:02.005
Job loss can be a deadly event.

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Um, if someone asks you, Hey,

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can you tell me about yourself?

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Or, and if you think about your answer, almost all

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of us start by describing our job.

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Even though we have many, many other identities,

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and for social, emotional

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and of course economic reasons,

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we do not cope very well with losing our job.

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I mean, 40% of US population live from paycheck to paycheck.

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And after losing a job, you're more likely

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to die from health issues, even take our own lives,

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blame immigrants and also vote extreme.

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And one of the most important

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and underused roles of A CEO is letting people go knowing

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that it's going to cause a lot of harm,

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to your employees.

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So the question for me was how do managers react

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to their employees are suffering?

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Do they internalize it or don't carry at all?

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And if they do feel bad,

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and let's call this feeling of guilt, psychological costs

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or moral costs, what are the implications?

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So there's vast research on people's prosociality

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or how we are not a hundred percent selfish

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as often assumed in classical economics.

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So for example, biology research,

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evolutionary biology research tells us that

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human beings are genetically wired to care for others.

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So, excuse me, babies as early as 12 to 18 months,

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share toys, and this is without external reinforcement.

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Or if you ask someone to play a dictator game,

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where you're assigned to, we are assigned a hundred dollars

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to divide between you and another person,

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and the other person has to take what you give

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Two patterns emerge,

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and this is very robust across

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different countries and cultures.

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So first, very few people take all hundred dollars,

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even though that's a rational, smart thing to do.

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And second, there's significant differences in

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how much people give to others, indicating

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that we differ in the degree of our prosociality,

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so people at least on average care about others.

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What does this prosociality extend to CEOs and

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because they're certainly not your average folks,

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because they're subject to at least three distinct

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and forceful influences.

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So first, there's the selection channel,

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where pro-social people just don't make it

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to the top in the,

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in the very competitive executive labor market.

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And second, there may also be a treatment channel

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where power has this corrupting effect

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and makes even good people selfish.

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I mean, if the board is giving you $10 million bonus

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to reduce costs, then I think you've think twice about

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retaining employees that you don't absolutely need.

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And third,

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maybe it doesn't really matter whether CEOs are pro-social

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or not, because activist hedge funds are breathing down your

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neck and all you can do as a CEO, it's focused on how

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to maximize the profits so that you

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Get to keep your own job.

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And in this project, I make a case

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that at least some managers are pro-social

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and viewing them not as a selfish villain,

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but a human being who care about others to a bearing extent

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as critical implications to understanding

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how they make decisions, formulate strategy and,

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and also how the government should think about designing

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social insurance programs.

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Basic idea of this project is pretty straightforward.

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So CEOs incur moral costs from laying off their employees

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and this moral cost constrains layoffs.

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But when the government provides a bigger cushion

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for workers to fall back on

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and reduce the cost of losing a job,

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then CEOs feel morally licensed

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to engage in more aggressive layoffs.

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I mean, more licensing a very powerful mechanism

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that can have perverse effects.

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Um, I think you will recognize it immediately once you get,

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once you get to thinking about it.

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So, a while back, I started exercising to lose a bit

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of weight, but ended up gaining more

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because I felt that it was okay to eat three burgers instead

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of just two because I worked on and burn some calories.

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And there's this fascinating research that

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after having voted for Obama, you're more likely

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to support potentially dis discriminating hiring decisions

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because you are self-assured of your moral credentials.

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And if the states increases

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or increasing employment insurance benefits,

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which are funded by corporate taxes.

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So as a manager, your firm is contributing to it,

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then you feel more licensed to let your employees go.

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And anecdotally, CS profess

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that expansion in unemployment insurance

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during the pandemic years may lay us more a quote palatable

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and without feeling that they're abandoning their employees.

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So my co-author Stepan Meyer

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and I conduct a host of analysis

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to demonstrate these dynamics

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and the details can be a little bit complex,

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but I think the basic idea

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behind our empirical design is pretty straightforward.

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So let's look at times when CEOs are forced

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to consider layoffs.

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And I look at how much your industry is exposed

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to Chinese import competition.

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So this is a macroeconomic shock that you

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as a CEO have very little control over

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and led to the decimation of US manufacturing jobs

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and also decimation of manufacturing jobs in in EU as well.

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And if you're a steel maker in Minnesota

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or Pennsylvania, you really don't like

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to compete against low cost Chinese competitors,

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and you have to think about letting some people go.

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But what's interesting to think about is

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so different states, for example, Minnesota

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and Pennsylvania defer a lot

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in when they expend it on

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employment benefits and by how much.

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And the decision to expend UI benefits defer by states.

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And it depends a lot on state level

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political considerations.

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So for example, if the governance governor is engaged in a

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tough reelection campaign, you can imagine

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what policies they'll push.

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We find that a 10% increase in unimplemented insurance

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benefits increases layoffs by 25% or one percentage point.

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And, and to make a stronger case

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that the proposed moral cost is behind this finding.

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And we next conducts, three sets of additional analysis.

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So first we look at heterogeneity across managers.

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Um, UI expansions will matter little

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for CEOs like Jack Welch, the ex CEO of GE who declares

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that re retaining the bottom 10% of the workforce is cruel

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and amount to false kindness.

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But this category of CEOs, those

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who take all hundred dollars in the dictator game

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that I just talked about earlier,

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will fire employees regardless

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of whether there's a social safety net in place or not.

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And we indeed find that this type

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of CO makes more aggressive layoffs in response

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to the input competition than is expected.

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The reduction in moral cost from

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UI has little effect on them.

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They were never bound by the moral cost in the first place.

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But in contrast, among pro-social CEOs

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who usually dismiss fewer workers, we see

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that UI expansions lead to more licensing

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and lead to greater layoffs.

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So first, we look at sort

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of differences across different types of CEOs.

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Second, we look at the strengths

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of a firm's corporate governance.

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So if you have an activist hedge fund monitoring your every

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move and pushing for big layoffs, it's going

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to be a lot more difficult

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to act on your post visual preferences.

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And we find that our findings are stronger among CEOs

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who are better insulated against.

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So the performance pressures of the capital market.

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So it really depends on,

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so which capital market you're operating in

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and how much pressure you're facing at the time.

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And thirdly, we look at whether firms are running out

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of cash to just keep the firm going.

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So it's a lot more difficult to be pro-social

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and help others when your firm is about to go under.

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And we find that moral cost

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and the desire to not harm your employees plays a much

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bigger role when the firm has some financial slack.

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For me, this was a very fun project, to work

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with Stefan Meyer and, and,

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and to complete for three reasons.

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Um, so first, we wanted to show

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that not all CEOs are bad people.

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The CEOs were once considered heroes in modern American

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culture, but they're not increasingly portrayed as fat cats

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who prioritize their financial self-interests

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with little concern for their employees

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and society at large.

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And, and yes, there are greedy, selfish CEOs,

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but not all CEOs.

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And, and today there's so much discussion about

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how CEOs need to be more ethical and moral.

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And I completely agree,

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but I also think that we need a,

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we need a more accurate baseline

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and understanding of what helps

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and stops them from acting on their innate

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desire to be good.

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In fact, I mean, some

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of the most important social acts, remain invisible.

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So CSR activities like investing in green technologies,

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you tell everyone in the world about it

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because that's how you get your money's worth,

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but that's only half the picture.

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So if you're keeping super close employees on,

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on the payroll so that they don't lose medical insurance

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or this person can finish his chemo, in the us,

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medical insurance is tied to the work.

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You must hide that, especially from your shareholders.

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And bringing into discussion these hidden

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or less visible acts of managerial sociality is I think,

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critical to having a more constructive discussion.

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And I think second

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and the project provides a more complicated assessment

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of good or pro-social CEOs complicated,

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but I think more realistic.

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So the good people make the best CEOs,

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but sometimes you have to let some people go so

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that you can hire more people down the road.

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I mean, growth is fundamentally very messy process

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and characterized by the proverbial

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about creative destruction.

10:15.685 --> 10:19.215
Prosocial CEOs may be forgoing the opportunity to hire

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and help more people long term

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because they don't want to hurt current employees

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that are socially and emotionally attached to.

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So in this sense, prosociality leads to myopic decisions.

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So being nice to your in-group members often come at the

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cost of being less generous to our group members,

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for example, immigrants and creating a whole host

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of other morally very complex situations.

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And third, and lastly, I'm excited to highlight a,

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a novel aspect of an implement insurance.

10:51.205 --> 10:52.305
And I mean, this is one

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of the largest social insur insurance programs

10:54.525 --> 10:55.545
in the US in the world.

10:56.545 --> 10:58.045
And both academic

10:58.105 --> 11:00.685
and political discussions tend to focus on

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how making on implementing insurance more generous,

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can make people lazy and, and not look for a job

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because that they have the money to spend.

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I mean, we know this dynamic exists,

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but it's actually very, very small effect.

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And my finding suggests

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that social insurance programs can actually improve economic

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efficiency by letting pro social seals make more aggressive

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downsizing decisions.

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I mean, there's a lot more work to be done in this regard,

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but the premise that strengths social safety nets can

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facilitate layoffs.

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It's, it's not just a theory,

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but it finds support in the, flex security model

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of Dutch and the initial labor markets.

11:39.625 --> 11:43.885
So this national political strategy, combines government

11:44.165 --> 11:45.885
provided comprehensive social safety nets

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or the unemployed with flexible labor market policies

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that permit easy layoffs.

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So there was a grand bargaining between labor and,

11:54.505 --> 11:58.245
and the companies, sort of, facilitated

11:58.265 --> 11:59.685
by the bigger role of the government.

12:01.195 --> 12:03.805
I mean, to wrap up, I mean, if you think about

12:03.835 --> 12:05.845
what limits the decisions we make

12:05.985 --> 12:09.325
and firm profit seeking, sometimes it's about the lack

12:09.325 --> 12:10.885
of information or capability.

12:11.815 --> 12:15.835
But I think just as frequently we're checked by our desire

12:15.855 --> 12:17.955
to be good and fair and moral.

12:19.175 --> 12:21.395
So this is an example from our psychology.

12:21.615 --> 12:24.595
But if you're offered a hundred dollars to kick a stray dog,

12:25.135 --> 12:27.235
I hope you wouldn't, and most people wouldn't.

12:27.895 --> 12:30.685
And think of carefully, thinking carefully about

12:31.185 --> 12:32.205
how our morality

12:32.465 --> 12:35.845
and the desire not to hurt others affect our decision making

12:36.385 --> 12:39.445
is a fun exercise, but also economically significant.

12:39.465 --> 12:39.685
One.

The Emotional Impact of Job Loss

00:00:00 - Job loss can be a deadly event. if someone asks you, Hey, can you tell me about yourself? Or, and if you think about your answer, almost all of us start by describing our job. Even though we have many, many other identities, and for social, emotional and of course economic reasons, we do not cope very well with losing our job. I mean, 40% of US population live from paycheck to paycheck. And after losing a job, you're more likely to die from health issues, even take our own lives,
00:00:34 - And one of the most important and underused roles of A CEO is letting people go knowing that it's going to cause a lot of harm, to your employees. So the question for me was how do managers react to their employees are suffering? Do they internalize it or don't carry at all? And if they do feel bad, and let's call this feeling of guilt, psychological costs or moral costs, what are the implications? So there's vast research on people's prosociality
00:01:06 - as often assumed in classical economics. So for example, biology research, evolutionary biology research tells us that human beings are genetically wired to care for others. So, excuse me, babies as early as 12 to 18 months, share toys, and this is without external reinforcement. Or if you ask someone to play a dictator game, where you're assigned to, we are assigned a hundred dollars
00:01:36 - and the other person has to take what you give Two patterns emerge, and this is very robust across different countries and cultures. So first, very few people take all hundred dollars, even though that's a rational, smart thing to do. And second, there's significant differences in how much people give to others, indicating that we differ in the degree of our prosociality, so people at least on average care about others.
00:02:10 - because they're certainly not your average folks, because they're subject to at least three distinct and forceful influences. So first, there's the selection channel, where pro-social people just don't make it to the top in the, in the very competitive executive labor market. And second, there may also be a treatment channel where power has this corrupting effect and makes even good people selfish. I mean, if the board is giving you $10 million bonus
00:02:42 - retaining employees that you don't absolutely need. And third, maybe it doesn't really matter whether CEOs are pro-social or not, because activist hedge funds are breathing down your neck and all you can do as a CEO, it's focused on how to maximize the profits so that you Get to keep your own job. And in this project, I make a case that at least some managers are pro-social and viewing them not as a selfish villain,

Moral Costs and Layoff Decisions in Companies

00:03:12 - as critical implications to understanding how they make decisions, formulate strategy and, and also how the government should think about designing social insurance programs. Basic idea of this project is pretty straightforward. So CEOs incur moral costs from laying off their employees and this moral cost constrains layoffs. But when the government provides a bigger cushion for workers to fall back on and reduce the cost of losing a job,
00:03:41 - to engage in more aggressive layoffs. I mean, more licensing a very powerful mechanism that can have perverse effects. I think you will recognize it immediately once you get, once you get to thinking about it. So, a while back, I started exercising to lose a bit of weight, but ended up gaining more because I felt that it was okay to eat three burgers instead of just two because I worked on and burn some calories. And there's this fascinating research that
00:04:14 - to support potentially dis discriminating hiring decisions because you are self-assured of your moral credentials. And if the states increases or increasing employment insurance benefits, which are funded by corporate taxes. So as a manager, your firm is contributing to it, then you feel more licensed to let your employees go. And anecdotally, CS profess that expansion in unemployment insurance during the pandemic years may lay us more a quote palatable
00:04:49 - So my co-author Stepan Meyer and I conduct a host of analysis to demonstrate these dynamics and the details can be a little bit complex, but I think the basic idea behind our empirical design is pretty straightforward. So let's look at times when CEOs are forced to consider layoffs. And I look at how much your industry is exposed to Chinese import competition. So this is a macroeconomic shock that you
00:05:18 - and led to the decimation of US manufacturing jobs and also decimation of manufacturing jobs in in EU as well. And if you're a steel maker in Minnesota or Pennsylvania, you really don't like to compete against low cost Chinese competitors, and you have to think about letting some people go. But what's interesting to think about is so different states, for example, Minnesota and Pennsylvania defer a lot in when they expend it on employment benefits and by how much.
00:05:51 - And it depends a lot on state level political considerations. So for example, if the governance governor is engaged in a tough reelection campaign, you can imagine what policies they'll push. We find that a 10% increase in unimplemented insurance benefits increases layoffs by 25% or one percentage point. And, and to make a stronger case that the proposed moral cost is behind this finding.

Diverse CEO Responses to Unemployment Insurance Changes

00:06:22 - So first we look at heterogeneity across managers. UI expansions will matter little for CEOs like Jack Welch, the ex CEO of GE who declares that re retaining the bottom 10% of the workforce is cruel and amount to false kindness. But this category of CEOs, those who take all hundred dollars in the dictator game that I just talked about earlier, will fire employees regardless
00:06:51 - And we indeed find that this type of CO makes more aggressive layoffs in response to the input competition than is expected. The reduction in moral cost from UI has little effect on them. They were never bound by the moral cost in the first place. But in contrast, among pro-social CEOs who usually dismiss fewer workers, we see that UI expansions lead to more licensing and lead to greater layoffs.
00:07:20 - of differences across different types of CEOs. Second, we look at the strengths of a firm's corporate governance. So if you have an activist hedge fund monitoring your every move and pushing for big layoffs, it's going to be a lot more difficult to act on your post visual preferences. And we find that our findings are stronger among CEOs who are better insulated against. So the performance pressures of the capital market. So it really depends on, so which capital market you're operating in
00:07:54 - And thirdly, we look at whether firms are running out of cash to just keep the firm going. So it's a lot more difficult to be pro-social and help others when your firm is about to go under. And we find that moral cost and the desire to not harm your employees plays a much bigger role when the firm has some financial slack. For me, this was a very fun project, to work with Stefan Meyer and, and, and to complete for three reasons.
00:08:25 - that not all CEOs are bad people. The CEOs were once considered heroes in modern American culture, but they're not increasingly portrayed as fat cats who prioritize their financial self-interests with little concern for their employees and society at large. And, and yes, there are greedy, selfish CEOs, but not all CEOs. And, and today there's so much discussion about how CEOs need to be more ethical and moral.
00:08:56 - but I also think that we need a, we need a more accurate baseline and understanding of what helps and stops them from acting on their innate desire to be good. In fact, I mean, some of the most important social acts, remain invisible. So CSR activities like investing in green technologies, you tell everyone in the world about it because that's how you get your money's worth, but that's only half the picture. So if you're keeping super close employees on,

Navigating Moral Dilemmas in Corporate Leadership

00:09:27 - or this person can finish his chemo, in the us, medical insurance is tied to the work. You must hide that, especially from your shareholders. And bringing into discussion these hidden or less visible acts of managerial sociality is I think, critical to having a more constructive discussion. And I think second and the project provides a more complicated assessment of good or pro-social CEOs complicated,
00:09:57 - So the good people make the best CEOs, but sometimes you have to let some people go so that you can hire more people down the road. I mean, growth is fundamentally very messy process and characterized by the proverbial about creative destruction. Prosocial CEOs may be forgoing the opportunity to hire and help more people long term because they don't want to hurt current employees that are socially and emotionally attached to.
00:10:32 - So being nice to your in-group members often come at the cost of being less generous to our group members, for example, immigrants and creating a whole host of other morally very complex situations. And third, and lastly, I'm excited to highlight a, a novel aspect of an implement insurance. And I mean, this is one of the largest social insur insurance programs in the US in the world. And both academic
00:11:01 - how making on implementing insurance more generous, can make people lazy and, and not look for a job because that they have the money to spend. I mean, we know this dynamic exists, but it's actually very, very small effect. And my finding suggests that social insurance programs can actually improve economic efficiency by letting pro social seals make more aggressive downsizing decisions. I mean, there's a lot more work to be done in this regard,
00:11:31 - facilitate layoffs. It's, it's not just a theory, but it finds support in the, flex security model of Dutch and the initial labor markets. So this national political strategy, combines government provided comprehensive social safety nets or the unemployed with flexible labor market policies that permit easy layoffs. So there was a grand bargaining between labor and, and the companies, sort of, facilitated
00:12:01 - I mean, to wrap up, I mean, if you think about what limits the decisions we make and firm profit seeking, sometimes it's about the lack of information or capability. But I think just as frequently we're checked by our desire to be good and fair and moral. So this is an example from our psychology. But if you're offered a hundred dollars to kick a stray dog, I hope you wouldn't, and most people wouldn't. And think of carefully, thinking carefully about

Decisions: Balancing Morality and Economics

00:12:39 - and the desire not to hurt others affect our decision making is a fun exercise, but also economically significant. One.

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