Pinar Yildirim, Marketing, The Wharton School, and Mustafa Doğan, MIT Sloan School of Management
Abstract: In this study we are concerned with the rational reasons for why in human-machine systems, the productivity of the man can be lower compared to the productivity of the man in the human-human systems. We explain the observation by the distortion of incentives which is required to motivate the remaining men in workplace. We develop a model based on Choi (2001) and study two possible incentive contracts: contracts that reward employees when their peers also exert effort (joint performance evaluation or JPE) and contracts that reward employees when they perform better than their peers (relative performance evaluation or RPE). These two regimes consider the wage contracts we observe in real life which are either created based on collaboration or competition between individuals in teams. We show that replacement of humans with the machine results in three major shifts in the workplace. First, one or multiple units of stochastic human effort is replaced with the machine effort which is either constant or less stochastic relative to the human effort. Second, machines are generally adopted due to their cost benefits, implying that the cost of conducting a task is generally lower with machines compared to humans. Third, a machine cannot retaliate against its peer which is taking advantage of the effort it demonstrates, and the reasons for lower productivity of human-machine teams stem from this property. For these reasons, in some combinations firms may prefer man and machine combination teams less often.