Tech companies like Tesla and Google have popularized the concept of a ‘flat’ business organizational structure with minimal hierarchy where all employees have a say in decision-making. Proponents claim it helps ensure the business arrives at the best strategy, but does it truly give them a competitive advantage?
“It’s a tough thing to figure out based on market data,” says Christian Vossler, head of the Department of Economics at the University of Tennessee, Knoxville. “Google might have a different structure than Microsoft, but too many other things differ between the companies to attribute behavior solely to the organizational structure.”
The Haslam College of Business’ Experimental Economics Lab provides a controlled setting where researchers can test specific drivers like organizational structure. Eli Freeman, a doctoral student in economics, recently used the lab for this exact scenario.
For his experiment, participants were divided into groups of three, asked to choose between business strategies and paid based on their decisions. In one group, a single participant was the ‘boss’ and made decisions without input from others. In two other groups, participants could make recommendations up the chain, and the last group was fully democratic. The democratic structure led to the highest payoffs for the entire group. As the structure became more vertical, the participants with more power became more self-interested and less interested in the group outcome.
“Economics experiments are the perfect tool in situations like this where it’s either impossible or extremely expensive to test our ideas in the real world,” Freeman says.
The studies conducted in the Experimental Economics Lab almost always take this form — as a sort of game that examines what drives human behavior. They resemble psychology studies except that participants earn and spend real money. The lab provides a unique environment where economists can isolate and test one factor, but Vossler says including money assures experiments still relate to the real world.
“For any conclusions to be valid in an economics experiment, there have to be financial incentives,” he says. “Faculty members get grants for their research, but it’s difficult for doctoral students to rely on this kind of funding because there is such a time delay in receiving funds and so much uncertainty.”
A recent endowment established by Russell and Jennifer Lamb will help make more graduate student experiments like Freeman’s possible. The $100,000 gift will be used with other sources to fund multiple experiments for students throughout the year. Russell Lamb says that the gift comes from a desire to enrich the understanding of economic behavior and the UT campus.
“Over the past decade the economics department at UT has built a national reputation in applied research and especially experimental methods,” Lamb says. “Going forward, the dynamic group of young researchers in the department are poised to take it even further.”
Economics doctoral student Adrienne Sudsbury says access to the economics lab attracted her to the program and will set up her future in academic economics.
“It’s an incredible opportunity that we have here; less than a quarter of the Ph.D. economics programs have this kind of lab,” Sudsbury says. “I’ve conducted three experiments in the span of a year, and I hopefully have many more to come.”
Sudbury’s most recent experiment examined the best way to solicit point-of-sale charitable fundraising.
“We tested whether a fixed donation, ‘round-up’ method or open donation was the most successful,” Sudbury says. “Round up had the highest donation rate, but open ended donations by far resulted in the highest total funds raised.”
Freeman also notes that the ability to conduct these experiments has become a large part of his education at the college.
“Having the Experimental Economics Lab available was absolutely critical to my success here and it allowed me to really push the boundaries with my research,” he says.