Trust-Based Working Time and Organizational Performance: Evidence from German Establishment-Level Panel Data. December 2011

Transcription

1 Wrtschaftswssenschaftlches Zentrum (WWZ) der Unverstät Basel December 2011 Trust-Based Workng Tme and Organzatonal Performance: Evdence from German Establshment-Level Panel Data WWZ Dscusson Paper 2011/13 Mchael Beckmann, Istvan Hegedues

2 The Author: Prof. Dr. Mchael Beckmann Department of Human Resources and Organzaton (WWZ), Unversty of Basel Peter Meran-Weg 6 CH Basel Phone: +41 (0) mchael.beckmann@unbas.ch Istvan Hegedüs, Assstant Department of Human Resources and Organzaton (WWZ), Unversty of Basel Peter Meran-Weg 6 CH Basel Phone: +41 (0) stvan.hegedues@unbas.ch A publcaton of the Center of Busness and Economcs (WWZ), Unversty of Basel. WWZ Forum 2011 and the author(s). Reproducton for other purposes than the personal use needs the permsson of the author(s). Contact: WWZ Forum Peter Meran-Weg 6 CH-4002 Basel forum-wwz@unbas.ch

3 Trust-Based Workng Tme and Organzatonal Performance: Evdence from German Establshment-Level Panel Data Mchael Beckmann*, Istvan Hegedues** * Unversty of Basel, Center of Busness and Economcs, Department for Human Resources and Organzaton, Peter Meran-Weg 6, CH-4002 Basel, Swtzerland, Phone: +41-(0) , E-Mal: mchael.beckmann@unbas.ch ** Unversty of Basel, Center of Busness and Economcs, Department for Human Resources and Organzaton, Peter Meran-Weg 6, CH-4002 Basel, Swtzerland, Phone: +41-(0) , E-Mal: stvan.hegedues@unbas.ch December 2011 Abstract Ths paper emprcally examnes the mpact of trust-based workng tme on frm performance usng panel data from German establshments. Trust-based workng tme s a human resource management practce that nvolves a hgh degree of worker autonomy n terms of schedulng ndvdual workng tme. From the theoretcal vewpont, trust-based workng tme may affect worker motvaton postvely as well as negatvely. Therefore, at the establshment level the performance effects of trust-based workng tme reman an open queston. The analyss shows that both establshment productvty and proftablty ncrease wth the dffuson of trust-based workng tme. Referrng only to establshments wth trust-based workng tme arrangements, both performance effects are estmated at about 1-2 percent, whle n the full sample both performance effects are stronger rangng between about 2.5 and 5 percent. JEL Classfcaton: J24; J81; M50 Keywords: Trust-based workng tme, workng tme flexblty, frm performance

4 1 Trust-based workng tme s not just another flexble workng tme arrangement. In fact, trustbased workng tme can be seen as a means of transton to flexble workng hours that nvolves an ncrease along two dmensons: workng tme flexblty and employee dscreton. To a large extent the allocaton of workng tme s up to the employees concerned. As a consequence, the employer does not need to regster and control the employees workng tme any longer. Instead, the employer can control whether or not the employee acheves hs fxed objectves. Hence, trust-based workng tme mples a shft from nput control (recordng workng hours) to output control (recordng goal achevement). In the end, therefore, the noton of trust-based workng tme does not necessarly mean that the employer really trusts the employees n terms of not abusng ther newly ganed workng tme authorty by arbtrarly reducng workng effort. In recent years, trust-based workng tme has become more popular. For example, accordng to estmatons of the Cologne Insttute for Economc Research, 46 % out of 1,319 ntervewed companes employ workers facng the condtons of trust-based workng tme (Insttut der deutschen Wrtschaft 2010). Graf et al. (2007) determne a slghtly lower value for Swss frms. Moreover, 14 % of the employees surveyed report that they are free to set ther workng hours on ther own responsblty. The use of trust-based workng tme may have postve or negatve effects on establshment performance largely dependng on how employees respond to ths knd of workng tme flexblty. When a hgh amount of workng tme dscreton contrbutes to ncrease worker motvaton or decrease establshment costs, trust-based workng tme s lkely to ncrease establshment performance. For example, establshments wth trust-based workng tme arrangements may effectvely reduce drect admnstratve costs and unt labor costs by elmnatng workng tme regstraton or cuttng overtme, respectvely. If, however, more workng tme autonomy was assocated wth ncreasng counterproductve worker behavor due to nequalty ssues or self-organzed work ntensfcaton perceved as necessary to acheve the fxed objectves, establshment performance would rather be expected to declne. All n all, therefore, from a theoretcal perspectve the mpact of trust-based workng tme on establshment performance s heterogeneous and the net effect s ex ante unclear. The am of the present paper s to emprcally nvestgate the mpact of trust-based workng tme on establshment performance. For ths purpose, we use panel data from German estab-

5 2 lshments (the IAB Establshment Panel). Establshment performance s thereby measured by both establshment productvty and proftablty. Our econometrc model s based on a Cobb- Douglas producton functon whch s augmented by the share of trust-based workng tme workers as our man explanatory varable. Our estmaton strategy accounts for potental endogenety bases caused by unobserved establshment characterstcs, reverse causalty or selectvty, so the parameter estmates can be vewed as causal effects. Our paper adds to the exstng lterature n varous ways. To the best of our knowledge, the present study s the frst that emprcally examnes the mpact of trust-based workng tme on organzatonal performance usng a large-scale establshment-level data set. Furthermore, snce our parameter estmates can be nterpreted as causal effects, our results allow the dervaton of management mplcatons for the effectve use of trust-based workng tme. Theoretcal Background Frst of all, t has to be mentoned that the use of trust-based workng tme s lkely to affect the well-beng and wealth of both workers and employer. Thereby, trust-based workng tme may nvolve benefcal or unfavorable consequences for both labor market partes. The followng dscusson summarzes the pros and cons of trust-based workng tme from the perspectve of the workers and the employer. Accordng to the job characterstcs model of Hackman and Oldham (1976; 1980), the employees work motvaton can be mproved by job desgn. Thereby, an approprate job desgn takes the followng job characterstcs nto account: skll varety, task dentty and sgnfcance, worker autonomy and feedback. The job characterstcs model predcts that hgh degrees of these job characterstcs are lkely to mprove workng condtons and thus also have a postve mpact on work morale and job performance. Snce trust-based workng tme s a human resource management tool that contrbutes to mprove at least two of these job characterstcs just mentoned.e., worker autonomy and feedback we can assume a postve nfluence of trust-based workng tme on worker motvaton and performance. 1 1 Applyng a model of employee attendance, Dalton and Mesch (1990) argue smlarly predctng a negatve relatonshp between flexble workng tme arrangements and absenteesm through ncreases n worker autonomy, responsblty and job satsfacton.

6 3 Another beneft for the workers may result from the change of the establshment s workng tme culture whch accompanes the mplementaton of trust-based workng tme (MacEachen et al. 2008). The transton from workng tme regstraton to a management by objectves strategy nvolves a break wth the attendance clock era. Ths strategy change sgnals that not the workers pure attendance tme at the frm has to be remunerated but the workers goal achevement (Böhm et al. 2004). As a result, workers are encouraged to desgn ther workng tme more effcently and develop a tme management that allows them to balance work, lesure and famly. Hence, workers may fnd trust-based workng tme benefcal, because workng tme dscreton contrbutes to mprove ther work-lfe balance and may thus ncrease job satsfacton and motvaton (Snge and Croucher 2003; MacEachen et al. 2008). In ths sense, trust-based workng tme may also be vewed as a gft from the employer that allows employees to balance ther work and lfe responsbltes (Perry-Smth and Blum 2000; Rau and Hyland 2002). In exchange to the employer s gft, therefore, workers are assumed to respond by provdng a hgh effort level. Smlar to ths reasonng, Perce and Newstrom (1980) as well as Baltes et al. (1999) argue that employees workng under flexble tme arrangements can adapt more effcently to ndvdual crcadan rhythms and are thus more able to harmonze competng demands. Snce trust-based workng tme mples that the employer consders ndvdual preferences and crcadan rhythms to a large extent, the employees atttudes and behavors towards ther work may be mproved leadng to hgher work morale. Although the reasonng so far emphaszes the perspectve of the workers respondng postvely to trust-based workng tme, t can easly be seen that an ncreased worker motvaton caused by a hgh degree of workng tme dscreton s also lkely to have a postve mpact on organzatonal performance (Böhm et al. 2004). Consequently, trust-based workng tme may not only be benefcal for the workers concerned but also for the employer va ncreased establshment performance measures lke productvty, proftablty or employee retenton (Snge and Croucher 2003; Wngen et al. 2004). Apart from the antcpated postve effects of trust-based workng tme on establshment performance resultng from postve worker responses there are drect cost effects assocated wth ths measure of workng tme flexblty. Frst, trust-based workng tme mples an elmnaton of drect admnstratve costs of workng tme regstraton. Second, trust-based workng

7 4 tme contrbutes to lower unt labor costs by cuttng overtme. When workng tme s no longer recorded, overtme s reduced or even elmnated by constructon (Wngen et al. 2004). As mentoned earler, trust-based workng tme may contrbute to mprove the work-lfe balance of employees by delegatng the decson rght of workng tme dscreton. Consequently, employers can use trust-based workng tme as a tool for recrutng and retanng qualfed employees, provded that these employees are nterested n schedulng ther workng tme autonomously (Snge and Croucher 2003). In ths context, trust-based workng tme s also n lne wth broader socetal developments such as the change of the tradtonal mage of the famly, the ncreasng labor supply of women and sngle parents or the change n values and ncreasng dversty of lfestyles. The consderaton of these developments wthn a sngle measure of flexble workng hours consequently mproves the attractveness of the company for potental employees (Rau and Hyland 2002; Wngen et al. 2004). Ultmately, the reasonng so far s nsstently n lne wth the hypothess that trust-based workng tme s gong to enhance organzatonal performance, e.g., va ncreased worker motvaton or the reducton of establshment costs. On the other hand, however, trust-based workng tme mght also have a negatve mpact on establshment performance. For example, ncreased workng tme dscreton may nduce an employee to ntensfy hs workng effort n order to reach the fxed goals. As a result, separatng workng tme from lesure tme becomes more and more dffcult. Moreover, replacng nput by output control mght put addtonal pressure on the employee who therefore responds by ncreasng hs actual workng tme and neglectng work-lfe balance ssues. However, nstead of beng more productve, ths self-organzed work ntensfcaton may crowd out ntrnsc worker motvaton and even harm the mental and organc health of employees. As a consequence, accordng to ths work ntensfcaton hypothess, establshment performance mght also be nhbted, for example, by ncreased absenteesm or productvty losses (Snge and Croucher 2003; Wngen et al. 2004; Böhm et al. 2004). Trust-based workng tme may also contrbute to worsen the organzatonal clmate and s then lkely to affect organzatonal performance negatvely. Ths statement can be explaned by the fact that trust-based workng tme mples a decouplng of workng tme and attendance tme. Under the regme of trust-based workng tme employees perform less vsble for others than under the regme of workng tme regstraton. As a consequence, trust-based workng tme employees are endangered to be perceved as less productve, less commtted or labeled

8 5 as free rders. Such a stuaton can lead to mutual montorng, socal conflcts and dysfunctonal actvtes among co-workers, so n the end organzatonal clmate and thus organzatonal performance may be harmed substantally (Snge and Croucher 2003; Ngo et al. 2009). 2 Ths reasonng s consstent wth equty theory (Adams 1965). Accordng to equty theory employees compare ther reward-contrbuton rato wth the correspondng rato of coworkers. If the reference worker s reward-contrbuton rato s perceved to exceed the own rato, the concerned worker dentfes nequalty and can thus be expected to take actons n order to reduce perceved nequalty. In the present case, trust-based workng tme employees may be perceved as prvleged compared to employees workng under the regme of tme regstraton. In order to respond to perceved nequalty workers may act counterproductve, for example, by reducng ther effort level, so that establshment performance wll also be affected negatvely. All n all, therefore, the theoretcal dscusson wth respect to the mpact of trust-based workng tme on frm performance s heterogeneous. Trust-based workng tme may be assocated wth postve or negatve performance effects, so the net effect remans an open queston that calls for an emprcal analyss sheddng lght on ths ssue. Before turnng to the emprcal analyss, however, we provde a bref revew of the related emprcal lterature. Related Lterature Emprcal evdence on the performance effects of trust-based workng tme s scarce. The related emprcal research largely refers to flexble workng tme arrangements other than trustbased workng tme. Roughly speakng the emprcal work whch s relevant to our study can be separated nto three areas. At frst, there are varous studes examnng the effects of flexble workng tme at the ndvdual level. Other studes explctly focus on the mpact of flexble workng hours on organzatonal performance. Fnally, the thrd area conssts of studes that nvestgate the effects of trust-based workng tme on ndvdual and frm performance. The frst stream of related lterature addresses the mpact of flexble workng tme on outcomes measured at the worker level. The adapton of flexble workng tme arrangements af- 2 Furthermore, such a corporate culture may encourage employees who have the opton for trust-based workng tme not to make use of t snce they expect negatve consequences for ther career opportuntes or regardng ther perceved commtment.

9 6 fects employment and work organzaton patterns and thus the employees concerned (De Menezes and Kellher 2011; Beauregard and Henry 2009; Perry-Smth and Blum 2000). Many emprcal studes reveal a postve mpact of flexble workng tme arrangements on employee performance (Baltes et al. 1999; Kauffeld et al. 2004), atttudnal and behavoral outcomes lke job satsfacton, worker well-beng and motvaton (McNall et al. 2010; Scandura and Lankau 1997) and wages (Wnder 2009; Beblo et al. 2004). The man argument n ths context s that flexble workng tme mproves the employees work-lfe balance whch n turn ncreases ther motvaton and productvty. On the other hand, there are studes fndng negatve effects of flexble workng tme on worker outcomes lke health and well-beng (Janssen and Nachrener 2004) as well as work-lfe balance (Baltes et al. 1999). An explanaton for ths fndng s that flexble arrangements of work hours are often subject to company control and decson, so these arrangements nvolve only lttle worker autonomy. All n all, therefore, the effects of flexble workng tme on worker performance largely depend on the fact whether or not workng tme flexblty s accompaned by worker autonomy (Stavrou and Klanots 2010). The studes of Askenazy and Carol (2006) as well as Orgo and Pagan (2008) nvestgate the nfluence of flexble workng tme on employee outcomes n the context of a seres of nnovatve work practces such as part-tme work, employee nvolvement, job rotaton, work autonomy and teamwork. Regardng the mpact on workng condtons and subjectve well-beng at work, Askenazy and Carol (2006) fnd that flexble workng tmes are assocated wth more mental stran and greater tme pressure whch supports the work ntensfcaton hypothess. Smlarly, Orgo and Pagan (2008) obtan no or negatve effects of flexble workng hours and other forms of quanttatve workplace flexblty on job satsfacton, whle they fnd a postve mpact of employee nvolvement, work autonomy and other forms of qualtatve workplace flexblty. Ths fndng suggests a complementary relatonshp between flexble workng hours and worker autonomy. Another stream of emprcal lterature consders the nfluence of flexble workng tme arrangements on a range of organzatonal performance measures. In ths context, some studes show that frms provdng flexble workng tme arrangements may beneft from reductons n absenteesm and labor turnover (Stavrou and Klanots 2010; Konrad and Mangel 2000; Stavrou 2005). Ths fndng can agan be explaned wth an mproved work motvaton resultng from the delegaton of workng tme dscreton. In lne wth ths reasonng, other studes fnd

10 7 that frms offerng flexble workng tme arrangements are less lkely to have problems n terms of recrutng sklled workers (Rau and Hyland 2002; Dalton and Mesch 1990). In a recent study, Muehler and Steffes (2011) analyze the relatonshp between varous human resource practces and employee retenton. Thereby, the human resource practce workng tme flexblty also ncludes trust-based workng tme. The most mportant result for our purposes s a postve lnk between flexble workng tmes and employee retenton. Consstent wth the reasonng ponted out above ths result can be explaned by ncreased job satsfacton resultng from mproved tme dscreton. However, snce trust-based workng tme n ths study s seen as a part of a coherent system of human resource practces, an solated effect cannot be dentfed exactly. Moreover, there are studes that focus on the mpact of flexble workng tme on drect performance measures lke frm productvty (Shepard III et. al. 1996; Konrad and Mangel 2000; Bloom et al. 2011) frm effcency (Wolf and Beblo 2004; Kerkhofs et. al. 2008; Perry-Smth and Blum 2000) and fnancal performance (Sands and Harper 2007; Arthur 2003). These studes fnd qute mxed effects that largely depend on the specfc type of flexble workng tme arrangement as well as the concrete measure of organzatonal performance. Furthermore, there are dfferences wth respect to the emprcal strategy and data avalablty. For example, Shepard III et al. (1996) fnd that flexble workng tme ncreases frm productvty by about 10 percent. Ths study, however, s restrcted to the pharmaceutcal sector and addtonally lacks from not accountng for other human resource practces that are possbly correlated wth the use of flexble workng tme. In contrast, the data used n the study of Wolf and Beblo (2004) provde detaled nformaton about other human resource practces that are often mplemented together wth flexble workng hours, so the authors can dsentangle dverse effects resultng from flexble workng tmes and other human resource practces. Ther man fndng s that moderate workng tme flexblty s postvely related to frm effcency, whle stronger workng tme flexblty seem to have a negatve mpact. The authors conclude, however, that ther results should not be nterpreted n terms of causal effects. Smlar to the studes at the ndvdual-level, the emprcal studes at the frm-level do also often dffer wth respect to the conceptualzaton of flexble workng tme arrangements. More precsely, workng tme flexblty s often analyzed n the context of famly-frendly workplace practces (Perry-Smth and Blum 2000; McNall et al. 2010; Bloom et al. 2011) or hgh

11 8 performance work systems ncludng practces such as the reducton of herarches, employee nvolvement and autonomy or self-managed work groups. Here, varous studes dentfy sgnfcant complementartes between broadly defned flexble workplace practces regardng frm performance (e.g., MacDuffe 1995; Wolf and Zwck 2002; Whte et al. 2003). Fnally, a thrd stream of lterature relates to studes that explctly focus on the relatonshp between trust-based workng tme and ndvdual or frm performance. As already mentoned, emprcal evdence on ths topc s really scarce. Furthermore, to a large extent the nference of performance effects s derved from busness case studes and ntervews of employees and managers n terms of ther experences wth trust-based workng tme. For example, MacEachen et al. (2008) fnd qualtatve evdence for ncreasng workng ntensty caused by trust-based workng tme. Moreover, Wngen et al. (2004) as well as Neubert and Thomas (2005) detect a postve effect of trust-based workng tme on performance measures lke employee satsfacton, productvty, customer orentaton or declnng absenteesm. In contrast, Böhm et al. (2004) and Hapeter (2001) do not dentfy a clear trend. On the one hand, postve performance effects can be observed caused by enhanced worker autonomy and a changng corporate workng tme culture. On the other hand, some evdence s consstent wth the work ntensfcaton hypothess. However, due to small sample szes or the case study character of the analyses these results fal to be representatve. From a methodologcal perspectve the study of Hanglberger (2010) s qute near to our analyss. Usng the German Soco-Economc Panel and specfyng a fxed effects model, the author estmates the mpact of flexble workng tme arrangements ncludng trust-based workng tme on employee job satsfacton. The most mportant result from our vewpont s a postve effect of trust-based workng tme on employee job satsfacton. However, contrary to our study, Hanglberger (2010) does not account for reverse causalty or selectvty. Moreover, hs analyss s based on ndvdual-level data, whle our study uses establshment-level data. To sum up, the emprcal lterature on the mpact of flexble workng hours on ndvdual or frm performance s not unambguous. There a several reasons for ths mpresson. Most mportantly, the spectrum of flexble workng tme arrangements s qute large contanng a seres of sngle practces that are relatvely heterogeneous. Trust-based workng tme s one of these practces. As a result, the performance effects of workng tme flexblty largely depend

12 9 on the specfc workng tme measure. They cannot be generalzed or transferred to other measures of workng tme flexblty (De Menezes and Kellher 2011; Beauregard and Henry 2009). Gven these mxed and less clear-cut results, the emprcal evdence so far s not able to shed lght on the mpact of trust-based workng tme on establshment performance. To the best of our knowledge, our study s the frst that emprcally examnes the performance effects of trust-based workng tme usng a large-scale data set at the establshment-level. Moreover, none of the exstng studes on the effects of trust-based workng tme take the potental endogenety of ths knd of workng tme flexblty nto account. As a result, the estmated effects of trust-based workng tme cannot be nterpreted as causal effects, but represent smple correlatons nstead. 3 At the establshment level, however, the mplementaton of trust-based workng tme s lkely to be endogenous, snce establshments usng ths measure of workng tme flexblty can be expected to dffer systematcally from non-usng establshments. For example, successful establshments may be more lkely to mplement trust-based workng tme arrangements, so trust-based workng tme tself may be a functon of establshment performance. Therefore, an mportant objectve of our emprcal nvestgaton s to control for selectvty bases and unobserved frm characterstcs usng panel data and applyng approprate estmaton methods. 4 In ths sense, our paper should add qute substantally to the emprcal lterature on the performance effects of trust-based workng tme. Data, Varables and Descrptve Statstcs In our study, we use the establshment panel data of the Insttute for Employment Research (IAB). The IAB Establshment Panel s an annual survey of over 15,000 establshments of all sze classes and ndustres, whch makes t beng the most extensve establshment-level data set n Germany. The frms are selected from a parent sample of all German establshments that employ at least one employee covered by socal securty. Ths parent sample can be consdered as complete, because frms have to report about ther employees under socal securty by law. The selecton method s stratfcaton wth respect to ten categores of establshment sze and 16 economc sectors. Ths s why an establshment s probablty of beng selected 3 The study of Hanglberger (2010) s an excepton to ths statement, because the author at least controls for unobserved (tme-constant) ndvdual characterstcs. 4 In fact, the lack of emprcal work that allows the dervaton of causal performance effects of flexble workng tme arrangements has recently been crtczed by De Menezes and Kellher (2011), Beauregard and Henry (2009) as well as Stavrou and Klanots (2010).

13 10 ncreases wth employment. Hence, the IAB Establshment Panel s approxmately proportonal to employment and therefore representatve for the German economy. A large set of questons are covered perodcally, such as employment and wages, sales, nvestments, nternatonal trade, nnovatons, organzatonal change, worker representaton, as well as vocatonal and contnung tranng. Addtonally, specal topcs are covered by the questonnare every year. For example, the ncdence of trust-based workng tme s covered regularly every two years snce 2004, whle the dffuson of trust-based workng tme s solely covered n the panel wave of In order to estmate the mpact of trust-based workng tme on organzatonal performance we use both establshment productvty (measured as total sales) and establshment proftablty (measured as total sales mnus wage bll) as performance measures. Our key explanatory varable s the dffuson of trust-based workng tme captured by the number of employees workng under the regme of trust-based workng tme relatve to total employment. Fnally, we use a set of control varables that are qute common n estmatng the performance effects of certan human resource management practces wthn a producton functon framework of the Cobb-Douglas type. Note that the vector of control varables also contans varous measures of workng tme arrangements other than trust-based workng tme. Herewth, we take some of the related lterature nto account ndcatng that the mplementaton of a certan nnovatve work practce s often accompaned by other human resource practces. Hence, ths proceedng enables a more precse estmaton of the solated performance effect of trust-based workng tme. Table A1 n the appendx provdes the defntons and descrptve statstcs of the complete set of varables used n ths study. Fgures 1 and 2 provde some descrptve nformaton on the ncdence of trust-based workng tme wthn selected ndustres and establshment sze classes. [Insert Fgure 1 and Fgure 2 about here] The statstcs n fgures 1 and 2 clearly demonstrate that trust-based workng tme has been becomng more and more popular rrespectve of sector afflaton and frm sze. However, banks and nsurance companes are especally lkely to offer trust-based workng tme arrangements to ther employees. More than 50 % of the frms n ths ndustry apply ths n- 5 For an ntroducton to the IAB Establshment Panel see Fscher et al. (2009).

14 11 strument of workng tme flexblty followed by establshments of the sectors frm-related servces as well as mnng and energy, where almost 40 % have mplemented a trust-based workng tme arrangement. Apart from the postve tme effect, Fgure 2 addtonally demonstrates that the ncdence of trust-based workng tme ncreases wth establshment sze. Fgure 3 dsplays the dffuson of trust-based workng tme dependng on establshment sze. Thereby, the dsplayed values represent the share of workers wth trust-based workng tme arrangements n establshments that have already mplemented ths measure of workng tme flexblty. Not surprsngly, there s an nverse relatonshp between the proporton of trustbased workng tme employees and establshment sze. Note, however, that the share of trustbased workng tme employees appears to reman qute stable at a level of almost 15 % n establshments wth more than 100 employees. [Insert Fgure 3 about here] Econometrc Model In order to estmate the performance effects of trust-based workng tme, we specfy a Cobb- Douglas producton functon whch s augmented by the share of trust-based workng tme employees relatve to total employment, econometrc model, therefore, s % T, and a set of control varables X. Our basc ln P t = β 0 + β1 ln Kt + β2 ln Lt + γ % Tt + δ X t + µ + ξt + ut, (1) where P s our performance measure of establshment at tme t. In total, we apply two performance measures: Y s total sales and serves as a measure for establshment productvty, whle Y W s total sales mnus wage bll representng a measure for establshment proftablty. Furthermore, K represents captal stock (measured as total nvestments), L descrbes the nput factor labor (number of employees), and u s an error term wth zero mean and fnte varance. Fnally, dummes and ξ t represents cyclcal fluctuatons captured by a set of tme µ reflects unobserved tme-nvarant establshment characterstcs. The parameter of nterest to be estmated s γ.

15 12 Our estmaton strategy ams at addressng the potental endogenety of trust-based workng tme use. Thereby, we treat the establshment s dffuson of trust-based workng tme as an endogenous explanatory varable n the producton functon. Ignorng endogenety ssues would probably lead to a based and nconsstent estmate of γ n equaton (1), because establshments are lkely to dffer systematcally n ther propensty to adopt trust-based workng tme based on observed and unobserved factors. For example, an establshment s decson to mplement trust-based workng tme may depend on the skll structure of ts workforce as well as performance or busness cycle ssues. Therefore, our econometrc model s a structural model approach that allows for observed and unobserved tme-varyng establshment characterstcs. Specfcally, we estmate the followng two-equaton system: ln P % T = β ln K 1 = θ ln K 1 + β ln L + θ ln L γ % T + ψ X + δ X + ϕ M 1 + u + ϕ % T 2 jk + η = π Z + η. (2) Here, the frst equaton n (2) s the structural equaton, whle the second equaton n (2) s the reduced-form (or frst-stage) equaton. Note that Z ncludes all explanatory varables specfed for the structural equaton and addtonally contans two excluson restrctons, M and % T, as dentfyng nstrumental varables. The parameters are estmated usng the two-stage least squares estmator (2SLS), where the coeffcent γ n the structural equaton s of partcular nterest. Snce the model n (2) s overdentfed wth one overdentfyng restrcton, we can test the valdty,.e., relevance and exogenety of the appled nstruments. To be vald nstruments, the excluson restrctons must sgnfcantly contrbute to determne an establshment s share of trust-based workng tme employees wth the error term % T wthout beng correlated u n the structural equaton. Here, M s a dummy varable measurng whether or not an establshment apples formalzed goal-settng processes accordng to a management by objectves approach. As explaned above, the ntroducton of trust-based workng tme mples a change from nput control to output control. Consequently, there should be a strong postve relatonshp between M and % T. Moreover, we apply the groupspecfc mean of trust-based workng tme dffuson % T as a techncal nstrument for an establshment s actual dffuson regardng trust-based workng tme,.e., the share of trust-based

16 13 workng tme employees. 6 In our case, a group s determned by establshment sze class j and sector afflaton k. 7 % T jk s correlated wth T % by constructon, but there s no reason to expect that t has an nfluence on establshment performance n any other way than through ts effect on the actual share of trust-based workng tme employees of ths specfc establshment,.e., % T. Hence, we use one nstrument n substance ( M ) and one techncal nstrument ( % T ) to dentfy the model parameters. The nstrumental varables approach dsplayed n equaton (2) explctly accounts for potental endogenety ssues lke selectvty and reverse causalty. However, some studes apply estmaton strateges that addtonally control for tme-constant unobserved heterogenety n the producton functon. Snce our key explanatory varable % T,.e., the share of trust-based workng tme employees, s only avalable n the panel wave of 2006, we cannot account for unobserved establshment heterogenety estmatng a conventonal fxed effects model. However, an approprate soluton n ths case has been proposed by Black and Lynch (2001). 8 Applyng ther two-step estmaton strategy allows us to control for unobserved heterogenety n a stuaton, where the core explanatory varable s only avalable n one panel wave. Accordng to the frst step of the Black and Lynch approach, we estmate a standard Cobb- Douglas producton functon usng the wthn estmator. Ths Cobb-Douglas functon s augmented by year and sector dummes to control for cyclcal shocks and sectoral developments. Hence, the frst-stage estmaton equaton can be wrtten as ln P t = β 0 + β1 ln Kt + β2 ln Lt + α St + λ It + µ + ut, (3) where the vector S contans the year dummes and I denotes sector afflaton. From the estmates of equaton (3) we calculate the establshment-specfc, tme-nvarant component of the resdual,.e., µ = ln P ˆ β ln K ˆ β ln L ˆ α S ˆ λ I, (4) ˆ In a smlar way group-specfc means have also been used as techncal nstruments, for example, n Woessmann and West (2006) and Mueller (2009). Thereby, Woessmann and West (2006) are nterested n estmatng the effects of class-sze on student performance, whle Mueller (2009) focuses on the productvty effects of works councls n Germany. 7 All n all, we defned sx establshment sze classes and eght economc sectors. 8 The Black and Lynch estmaton approach has prevously been appled, for example, n Zwck (2004; 2005).

17 14 where the bars over the respectve varables represent average values over tme. The establshment fxed effect µˆ measures whether ndvdual performance structurally exceeds or falls below the performance of other establshments. In the second step, trust-based workng tme varable µˆ s regressed on the % T and a set of (quas-fxed) control varables X : ˆ µ = γ % T + δ X + ε, (5) where ε s an..d. random varable. The coeffcent γ s of partcular nterest, because ts estmate represents the mpact of the nternal dffuson of trust-based workng tme on the fxed effect of an establshment s performance. The parameters n equaton (5) are estmated by conventonal ordnary least squares. In order to smultaneously account for both selectvty and unobserved establshment heterogenety n the producton functon, we combne the Black and Lynch approach wth our structural model approach n equaton (2) and yeld ˆ µ = γ % T % T = ψ X + δ X + ϕ M + u + ϕ % T + η. 1 2 jk (6) In the end, the estmate of γ s the causal effect of trust-based workng tme dffuson on establshment performance. Emprcal Results Table 1 dsplays the performance effects of trust-based workng tme (parameter γ ) applyng dfferent estmaton technques. 9 The cross-secton OLS estmates for equaton (1) thereby serve as a reference for the estmates resultng from 2SLS as well as 2SLS n combnaton wth the Black and Lynch approach (equatons (2) or (6), respectvely). Table 1 dsplays the 9 In our analyss we exclude non-proft establshments and the publc sector. Furthermore, we exclude establshments of the bankng and nsurance sector because our dependent varables are based on total sales. However, snce the correspondng measure for banks and nsurance companes s based on total assets nstead of total sales, we decded not to consder these companes n our analyss.

18 15 estmates for the full sample and a restrcted sample ncludng only the establshments wth trust-based workng tme arrangements. 10 [Insert Table 1 about here] The OLS estmates reveal an economcally qute modest, albet hghly sgnfcant performance effect of trust-based workng tme dffuson wth a magntude of 0.3 percent. Thus, a one percent ncrease n the share of trust-based workng tme employees would be assocated wth a 0.3 percent ncrease n establshment performance. Ths holds for both performance measures,.e., productvty and proftablty, and s rrespectve of whether we use the full or the restrcted sample. However, the OLS estmates are lkely to be based and nconsstent as the OLS approach does not account for the potental endogenous nature of the trust-based workng tme varable. The potental endogenety of trust-based workng tme dffuson s explctly addressed usng 2SLS and ts combnaton wth the Black and Lynch approach. 11 Frst of all, the necessty to account for an endogenous dffuson of trust-based workng tme wthn establshments s strongly ndcated by Wooldrdge s robust score test (Wooldrdge 1995) that wth one excepton rejects the null hypothess of % T to be exogenous. Lookng at the parameter estmates, we can see a consderable ncrease of the coeffcent for the share of trust-based workng tme employees relatve to the OLS estmates. More precsely, the performance effect rses to about fve to sx percent n the full sample, at whch the proftablty effect s even slghtly hgher than the productvty effect. In the restrcted sample, however, whch ncludes only the establshments offerng trust-based workng tme arrangements to ther employees, we obtan a performance effect of about one or two percent. 12 These estmates pont to qute large performance dfferences between establshments wth and wthout trust-based workng 10 The OLS estmates of the nput factors K and L as well as the control varables can be found n Table A2 n the appendx. The frst-stage estmates resultng from the 2SLS approach are dsplayed n Table A3 n the appendx. The frst-stage estmates accordng to the Black and Lynch approach are dsplayed n Table A4 n the appendx. All remanng estmates are avalable from the authors upon request. 11 Note that the moderate sample sze reducton from 7,999 (855) to 7,693 (823) dsplayed n Table 1 s caused by the use of the excluson restrctons. 12 These performance effects are substantally smaller than the performance effect obtaned n the study of Shepard III et al. (1996) who found that flexble workng tme ncreases frm productvty by about 10 percent. Although the authors of ths study also apply an nstrumental varables estmaton strategy, one should be careful n terms of comparng the results. As mentoned n the related lterature secton, the study of Shepard III et al. (1996) s restrcted to the pharmaceutcal sector, whle our analyss covers all sectors apart from banks and nsurance companes as well as the publc and non-proft sector. Moreover, Shepard III et al. (1996) consder the productvty effects of workng tme flexblty n general and do not explctly focus on trust-based workng tme.

19 16 tme arrangements. More precsely, the performance dfferences n the two samples suggest that hgh performance establshments are more lkely to mplement trust-based workng tme than weak performng establshments. 13 The nformatve value of the 2SLS estmates largely depends on the valdty of the consdered excluson restrctons. Lookng frst at the parameter estmates of the excluson restrctons dsplayed n Table A3 n the appendx, we can see that both nstruments are hghly sgnfcant and thus relevant. Moreover, they exhbt the expected postve sgn. The relevance of the nstrumental varables s confrmed by the dagnostc F test dsplayed n Table 1. Ths F test checks for jont sgnfcance of the chosen excluson restrctons n the reduced-form equaton. The F statstc s always hghly sgnfcant and even conforms to the often clamed rule of thumb,.e., F > 10. Fnally, the excluson restrctons can be consdered as exogenous. Ths result s provded by Wooldrdge s robust score test of overdentfyng restrctons (Wooldrdge 1995) whch s leavng asde one excepton nsgnfcant at the 5 % level. Hence, the dagnostc tests support the valdty of the excluson restrctons and thus the nformatve value of the (combned) 2SLS estmates. All n all, therefore, our emprcal results are consstent wth the work motvaton hypothess emphaszng the benefts of trust-based workng tme for both workers and establshments. Senstvty Analyss In ths secton we run addtonal regressons that are ntended to check the robustness of our estmaton results presented prevously. Thereby, we examne whether our results are affected by the applcaton of an mputaton technque that ams at addressng a potental mssng value problem wth regard to our key explanatory varable % T. The mssng value problem may result from the fact that nformaton about the share of employees wth trust-based workng tme arrangements s only requested from those establshments that use trust-based workng tme just n some areas or departments. Unfortunately, the correspondng nformaton from establshments applyng trust-based workng tme for the entre establshment s not requested. As a consequence, a substantal number of establshments that defntely use trust- 13 Ths nterpretaton s confrmed by the results of a complementng regresson analyss, where we estmate the performance effects of trust-based workng tme dffuson applyng an endogenous swtchng regresson model. Here, we fnd that n both performance equatons the respectve coeffcents for nverse Mll s rato are negatve and hghly sgnfcant whch suggests that hgh performng establshments are systematcally more lkely to apply trust-based workng tme than ther lower performng counterparts.

20 17 based workng tme arrangements s excluded from provdng nformaton on the nternal dffuson of trust-based workng tme. Ths scenaro may even cause a sample selecton bas. We respond to ths problem by predctng the mssng shares of trust-based workng tme employees from the nformaton provded by establshments usng trust-based workng tme just n some areas of the establshment. Thereby, we assume that establshments wth a companywde applcaton of trust-based workng tme are more lkely to employ a hgher fracton of trust-based workng tme employees than establshments wth a qute selectve use of ths practce. Our further proceedng can then be descrbed n three steps. At frst, we group the establshments wth respect to establshment sze class j and sector afflaton k. In the second step, we calculate the 75 percent and the 90 percent quantl of our varable of nterest,.e., % T for each of the groups usng the avalable nformaton from the establshments wth a selectve use of trust-based workng tme. Fnally, we replace the mssng values for the establshments wth a company-wde trust-based workng tme use by mputng the respectve quantles obtaned for every group. All n all, therefore, ths mputaton strategy s a convenent procedure to address the descrbed mssng value problem adequately. 14 The applcaton of the mputaton technque just ntroduced allows us to ncrease the number of observatons for our man explanatory varable % T by 735 establshments from 7,999 to 8,734 (all establshments) or from 855 to 1,590 (establshments wth trust-based workng tme arrangements), respectvely. However, the use of the two excluson restrctons M and requred for the 2SLS estmatons agan slghtly reduces effectve sample sze to 8,386 (all establshments) or 1,516 (establshments wth trust-based workng tme arrangements), respectvely. % T Wth regard to the estmaton strategy we proceed analogously to our approach n the prevous secton and estmate the equaton system ˆ µ = γ % T % T = ψ X q + δ X + ϕ + u q 1M + ϕ2 % T jk + η, (7) 14 We decded to apply ths mputaton technque as potental alternatves usng predctons from regresson or nterpolaton methods exhbt some lmtatons. See Cameron and Trved (2010, p. 47). The present scenaro, for example, requres an mputaton technque accountng for the fact that we observe mssng values just for those establshments whch are especally lkely to employ large fractons of trust-based workng tme workers.

21 18 where q descrbes the respectve quantl,.e., q = 75, 90. Table 2 dsplays the resultng 2SLS estmates of γ for our modfed man explanatory varables 75 %T and 90 %T. 15 [Insert Table 2 about here] The second-stage estmates for 75 %T and 90 %T largely confrm the results dscussed n the prevous secton. After controllng for an endogenous dffuson of trust-based workng tme wthn a structural model approach both the productvty and the proftablty effect are postve and hghly sgnfcant. Interestngly, n those specfcatons applyng the full sample the proftablty effect slghtly exceeds the productvty effect, whch ndcates a small negatve wage bll effect of trust-based workng tme dffuson. 16 Comparng the pont estmates for 75 %T and n the prevous secton, we fnd slghtly smaller values for 90 %T wth the correspondng estmate for % T 75 %T and 90 %T than for % T. Ths outcome mght be nterpreted as an ndcaton for dmnshng margnal returns. Both 75 %T and 90 %T represent varables, where the mssng values for those establshments wth a company-wde use of trust-based workng tme arrangements are replaced by the groupspecfc 75 or 90 percent quantl. Hence, ths mputaton procedure s assocated wth an ncreasng average share of trust-based workng tme employees relatve to the shares measured by % T. Accordng to our fndngs, relatvely moderate proportons of trust-based workng tme employees are assocated wth slghtly hgher performance effects than hgher employment shares generated by the mputaton technque. However, we abstan from nterpretng ths fndng n terms of a non-lnear (concave) performance effect for two reasons. Frst, the results of ths secton are substantally based on mputed values added to actual observatons. Second, we observe that the performance effects of 90 %T slghtly exceed those obtaned for 75 %T. Ths fndng, however, s not consstent wth a concave performance effect of trustbased workng tme dffuson. 15 The frst-stage estmates and the second-stage estmates of the covarates are avalable from the authors upon request. 16 However, addtonal 2SLS wage bll estmatons do not support ths statement. The wage effect of trust-based workng tme dffuson turns out to be very small and mostly nsgnfcant.

22 19 The dagnostc tests conducted to check the endogenety problem as well as the valdty of the consdered excluson restrctons provde comparable results to those obtaned n the prevous secton. Note, however, that n the sample ncludng only the trust-based workng tme establshments the estmated productvty effects mght suffer from an endogenety problem concernng the excluson restrctons. Here, the robust score test of overdentfyng restrctons rejects the null hypothess of exogenous nstruments at the 5 percent level, so the correspondng pont estmates should be nterpreted cautously. As an alternatve, however, we consder the 2SLS estmates resultng from equaton (2), where and % T s replaced by 75 %T or % T s replaced by 75 %T or 90 %T 90 %T, respectvely. In the end, the resultng pont estmates are very smlar to those dsplayed n Table 2. Ths holds for both magntude (0.009 and 0.007) and sgnfcance. However, the robust score test of overdentfyng restrctons does no longer reject the null hypothess of exogenous nstruments ( χ 2 = , p = and χ 2 = 2.457, p = ), whch ndcates the valdty of our nstruments n ths case. All n all, therefore, the results of our senstvty analyss support the estmates n the prevous secton. Hence, we conclude that our fndngs are nsstently n lne wth the work motvaton hypothess emphaszng the benefcal consequences of trust-based workng tme for the workers concerned and thus the respectve establshments. Concluson In ths paper we emprcally examne the mpact of trust-based workng tme on frm performance usng German establshment-level panel data. The mplementaton of trust-based workng tme s assocated wth a hgh degree of worker autonomy wth regard to schedulng ndvdual workng tme. Theoretcally, workers may respond postvely as well as negatvely to ther newly ganed tme flexblty dependng on whether trust-based workng tme ncreases or declnes ndvdual worker motvaton. Based on an augmented Cobb Douglas producton functon we fnd that both establshment productvty and proftablty ncrease wth the dffuson of trust-based workng tme to a smlar extent. Thereby, the estmated performance effects range between about 2.5 and 5 percent, when we consder all establshments n the sample. However, when we restrct our analyss to establshments offerng trust-based workng tme arrangements at all, both performance effects reduce to about 1-2 percent. Ths performance dfference n the two samples

23 20 suggests that hgh performance establshments are more lkely to mplement trust-based workng tme than weak performng establshments. All n all, therefore, our results nsstently confrm the work motvaton hypothess assumng postve consequences of trust-based workng tme for the well-beng and wealth of workers and establshments. Our estmaton strategy accounts for the potental endogenety of trust-based workng tme dffuson by explctly addressng unobserved establshment characterstcs, reverse causalty and selectvty. For ths purpose, we combne the 2SLS method wth a two-step estmaton approach suggested by Black and Lynch (2001). As a consequence, therefore, the parameter estmates can be vewed as causal effects. Moreover, we apply an mputaton strategy to overcome a potental mssng value problem arsng from the constructon of the respectve questons about trust-based workng tme ssues n the questonnare. The results of the regressons applyng the mputaton technque strongly support our prevous estmates wth respect to the performance effects of trust-based workng tme dffuson, so we conclude that our results are robust. The results of our study provde some mportant management mplcatons for establshments reflectng upon the ntroducton or extenson of trust-based workng tme arrangements. Most mportantly, trust-based workng tme appears to be a valuable human resource practce, so employers can be encouraged to adopt or even ntensfy trust-based workng tme arrangements. The remanng mplcatons follow from the frst-stage estmatons of our nstrumental varables approach whch are dsplayed n Table A3 n the appendx. Frst, there s a complementary relatonshp between trust-based workng tme and some other practces of workng tme flexblty. Hence, trust-based workng tme can be ntegrated to a system of flexble workng tme practces that ncludes changes n the workng tme of part-tme workers, the ntroducton of workng tme corrdors or shfted workng tmes. Second, there s a strong correlaton between the dffuson of trust-based workng tme and a sklled workforce. Ths suggests that trust-based workng tme s especally productve n frms employng relatvely hgh shares of sklled workers. In other words, frms wth a hgh share of low-sklled workers should be careful regardng the mplementaton of trust-based