Bruno Frey

Career

Frey studied economics at the University of Basel and at the University of Cambridge, obtaining a doctorate in economics in 1965. In 1969 he was appointed associate professor of economics at the University of Basel. From 1970 to 2010, he was associate professor at the University of Basel. From 1970 to 1977, he was a full professor of public finance at the University of Konstanz in Germany. Frey was appointed as a full professor of economics at the Institute for Empirical Research in Economics (IEW) of the University of Zurich (UZH) in 1977.

His first book, Umweltökonomie (Environmental Economics), was published in Göttingen in 1972. During his career, he has been a prolific author, publishing hundreds of articles in economics as well as in a number of different fields including sociology, political science, and psychology. Some of his work has reached the top journals of the economics profession, such as The Journal of Political Economy and the American Economic Review. He is one of the most cited researchers according to the Institute for Scientific Information (ISI) and one of the most cited authors in economics according to Research Papers in Economics. Since its inception, Frey has been heading the Handelsblatt ranking of researchers at universities in Germany, Austria and Switzerland with respect to their lifework.

Frey was appointed managing editor of Kyklos, a Swiss journal on political economy, in 1969. He maintains that position to this day. Since 2004, he has served as one of four directors of research at the Center for Research in Economics, Management and the Arts (CREMA); besides Reiner Eichenberger (University of Fribourg), René L. Frey and Margit Osterloh (University of Zurich).

In 2004, he was appointed member of the eight-member expert committee of the Copenhagen Consensus, besides four Nobel laureates. The goal consisted in the development of recommendations as to which challenges of humanity (hunger, AIDS, water provision, access to sanitary systems, restrictions on trade, corruption and global warming) to give priority, based on economic cost-benefit analyses.

In July 2011, the University of Zurich decided to set up an ad hoc commission to investigate allegations of publication misconduct by Frey and his co-authors. In October of the same year the commission agreed on a report that found Frey guilty of misconduct. In 2012, the University of Zurich declined to renew his contract.
From 2010-2013 Frey worked as a professor at the Business School of the University of Warwick (UK).

In 2012, the government of Bhutan appointed him member of an international group of experts on the subject of Wellbeing and Happiness. The work and recommendations of the panel are scheduled to be presented and discussed in the United Nations General Assembly in 2013 and 2014.

From 2013-2015 Frey worked as Senior Professor at Zeppelin University, Friedrichshafen, Germany. Since August 2015 Frey is Permanent Visiting Professor at the University of Basel, Switzerland, where he is the Co-Founder of the Center for Research in Economics and Well-Being (CREW).

In the ranking of "the most influential economists in Switzerland" produced by the leading Swiss newspaper Neue Zürcher Zeitung in September 2014, which considers scientific performance and public perception in media and politics, Frey ranks on third place. Frey is ranked number 5 among German economists according to the F.A.Z.-Ranking of September 5, 2015.

Work

Frey's main focus lies on the application of economics to new areas (politics, art, history, terrorism and war, family) and the extension of the model of human behavior to incorporate psychological and sociological elements. He has been among the first economists to deal with: a) empirical models about the relation between the economy and politics, especially politico-economic cycles; b) new concepts of federalism (Functional, Overlapping, Competing Jurisdictions, FOCJ); c) crowding-out and intrinsic motivation; d) orders and awards.

Motivational Crowding Effects

Bruno S. Frey bases his works on motivational crowding effects in the research by social psychologists like Deci, Ryan or Kruglanski. These scholars empirically identified that external intervention in the form of a reward, reduces individuals’ intrinsic motivation. According to Deci's definition “One is said to be intrinsically motivated to perform an activity when one receives no apparent reward except the activity itself”. This relationship has been called "undermingin effect", "over justification effect" or "the hidden cost of reward" by psychologists. Frey introduces the term "crowding out" into economic science.

Bruno S. Frey together with Reto Jegen translates the motivational crowding effects originally researched in social psychology into economics theory. Frey indicates that the concept of price effects, on which micro-economics is founded, is not valid under all conditions and circumstances, and that the relationship between a monetary reward offered and supply must be analysed taking into account the research on motivational crowding effects. For the purpose of economic theorising, Frey generalises the concept of “hidden costs of rewards” in social psychology by differentiating the following concepts of crowding effects:

1. Intrinsic motivation is potentially affected by all kinds of intervention coming from outside the person considered. Thus, not only rewards, but also commands, may crowd out intrinsic motivation.
2. Intrinsic motivation may be reduced or raised (crowded-out and crowded-in). Thus, there may not only be hidden 'costs' but also hidden 'gains'.
3. External intervention affects the internally-held values of individuals. Hence, they do not only affect narrowly defined intrinsic motivation, but also norms internalised by individuals. Moreover, external intervention may induce a shift from other-regarding or group-regarding to more selfish preferences and behaviour.

Motivational Crowding Theory and work motivation

Frey, Osterloh and others find in several econometric studies that crowding theory is particularly relevant for work motivation: For example motivational crowding-out is more likely when principal and agent (employer and employee) have a personal relationship. If in these personalised relations material rewards are applied, intrinsic motivation fades due to the agent not perceiving to be acknowledged for its competences.

Motivational Crowding Effects and Taxation

In various studies Frey and others have investigated the effect of participation in the political processes on individual tax morale. They find that the intrinsic motivation to pay taxes (tax morale) depends strongly on the extent of trust of citizens in the political system and the possibility to participate the political process. In an empirical case for Switzerland they could show that cantons with direct democratic participation ceteris paribus had a better tax morale then cantons with only representative participation possibilities.

The Economics of Awards

Frey has contributed with dozens of papers and books to the currently evolving field of the Economics of Awards.

Together with Susanne Neckermann and others, Frey identifies major differences between monetary incentives and awards in corporate settings, stressing the smaller chance of crowding out intrinsic motivation of employees by applying awards. He considers major differences between monetary incentives and awards in:

1. The material costs of awards, consisting of a certificate or a small trophy, are typically low for the donours, but the value to the recipients may be very high. To some extent this also applies to prizes where, despite their name, the monetary value is often low.
2. Accepting an award establishes a special relationship. The recipient owes some measure of loyalty to the donour. This is not the case when a particular task is carried out in exchange for monetary compensation.
3. Prizes and awards tend to be handed out for a vaguely defined achievements. In these cases, awards are more adequate incentive instruments than monetary payments.
4. Prizes and awards are less likely to crowd out the intrinsic motivation of their recipients than monetary compensation because when they are conferred the donor praises the recipients for their performance.
5. Prizes and awards are not taxed, while monetary income is. Due to taxes falling on the giver and the recipient, there typically is a considerable wedge between the sum of money the donor has to spend and the net sum the recipient receives.

Political Economics

In this area, Bruno Frey puts a special emphasis on the analysis of the role of direct democracy. Together with Reiner Eichenberger, he developed a functionally oriented form of federalism called FOCJ (Functional, Overlapping, Competing Jurisdictions). He regards direct democracy as well as federalism as guiding institutions of the future.

Economics of Happiness

Bruno S. Frey is a major contributor to the new field of “Economics of Happiness“. In his book “Happiness - a Revolution in Economics” (published in 2010) Frey distinguishes three main areas which arguably produce a significant change into economics:

1. Life satisfaction as an approximation to the concept of utility: Introducing a measure for subjective life satisfaction or happiness into the field of economics provides the concept of utility with content. It allows researchers to empirically analyse deviations from rationality (a type of behaviour assumed in standard economic theory). Investigated errors in rational decision making are for example: (a) misprediction of utility of future consumption, (b) overestimation of the satisfaction one might derive from having a higher income in the future, (c) underestimation of utility gained from immaterial aspects of life, such as friendship and social relations. The Economics of Happiness investigates these behavioural aspects empirically and includes them into economic theorising and considers respective policy implications.
2. New insights in what actors value: Research on economic actors with measures of happiness and life satisfaction provides us with new insights on how individuals value goods, services and social relations. It shows that individual evaluations are broader than standard economic theory proposes. It especially reveals that individuals do not merely derive utility from income. Social relations, the possibility for self-determination, and the usage of own competences are of higher importance. Moreover, a new level of utility is introduced, as individuals do not only derive utility from outcomes, but also from processes themselves.
3. Significantly different policy consequences: Policy implications from the research in the Economics of Happiness deviate significantly from those derived in standard economics. Happiness research shows that a mere focus on increasing income is not an effective way to increase utility. Much of the utility increase of higher income dissipates rather quickly and induces individuals to seek even higher income. Furthermore, individuals do not evaluate income in absolute terms, but compare themselves with their peer group. Happiness Research emphasizes the importance of employment and leisure time for individual well-being. On a constitutional level, political participation rights prove to positively influence life satisfaction.

Income and Happiness

Frey and Stutzer, find in a study for the US - similar to many other scholars - that there is a solid positive relationship between life satisfaction and income. However, the relationship is not linear. There is a diminishing marginal utility of higher income: the increase of happiness of an additional unit of money is lower for the rich than for the poor. An important insight is that individuals rapidly adapt to a new standard of living and compare themselves with other individuals: not the absolute level of income counts, but the relative. Frey and Stutzer also investigate the role of income aspirations. They find that individuals with high income aspirations experience a reduced well-being for a given income or consumption level. Furthermore, they find for Swiss communities that the richer one’s neighbourhood is (in relative terms), the higher are the individual aspirations.

Democracy

Bruno S. Frey is a major scholar investigating the effects of direct democracy on society. One of Freys much recognized works argues that "A constitution for knives crowds out civic virtues". By econometrically comparing tax morale and happiness variables between countries with strong and weak direct democratic participation rights, he establishes that constitutional arrangements which incorporate trust and participation possibilities for citizens strengthen civic virtues for example in the form of tax morale. He thereby contradicts the widely held thesis in constitutional economics that free riding and opportunistic behaviour may only be counteracted by harsh rules, controls and punishment. In contrast, his research finds that to harshly control citizens crowds out their intrinsic motivation to behave in a morally sound manner. He suggests to extend political participation rights and public referenda to strengthen civic virtues - thus favouring a “trusting constitution”.

Corporate Governance

For many years Bruno S. Frey and Margit Osterloh have critically published on pay-for-performance. In a Harvard Business Review article they title: “Stop Tying Pay to Performance - The evidence is overwhelming: It does not work”. Especially in knowledge intensive service economies variable pay harms the efficiency of a firm. In a dynamic modern economy, performance variables are difficult to set and evaluate. Targets of a company, which are difficult to measure (e.g. quality, originality, customer satisfaction) tend to be neglected. Furthermore, since the criteria are set, there is no incentive for the employee to re-evaluate their soundness and purposefulness for the company. Variable pay for performance leads to employees which focus too much or narrowly on the aspects measured and evaluated; this leads to bad results. Especially for complex tasks, which only can be solved in a team, variable pay for performance creates what economists call the problem of “free riding”. Since the team is evaluated in general, members have an incentive not to collaborate and to withhold crucial knowledge. Furthermore, employees subject to variable performance do not passively accept the criteria for their pay, but strategically manipulate them in their favor. Moreover, variable pay for performance tends to crowd out intrinsic motivation, although this sort of motivation must be assumed to be of utter importance for innovation and work “beyond the call of duty”.

Community Enterprises

Frey and Osterloh show that due to little economic analysis of Community Enterprises (like Wikipedia, Linux, blockchain providers, R and many more) is most of the time done with inadequate economic methods. These structurally underestimate the economic potential and positive external effects of Community Enterprises and their provision of goods and services. Frey proposes that public policies should foster procurement in the sector of CEs and offer open access for publicly funded innovation.

Market for Prisoners of War

Bruno S. Frey (with Heinz Buhofer) analyses how “markets for humans” historically have been functioning in times of war. He suggests that in the Middle Ages the custom of taking prisoners and selling them back to their families and communities can be well analysed using an economic calculus of rational agents and markets. Frey and Buhofer show that the value of a prisoner can be modelled with costs and risks on the one side and expected pay outs on the other side. Taking prisoners and demanding ransom significantly reduced the brutality of wars in the Middle Ages. This situation changed when the soldiers and officers lost the property right in their prisoners. The property right was moved to larger units, and finally to the army as a whole. Under these conditions it became more attractive to just kill opponents in order to reduce the risk of fighting. As a result the number of soldiers killed and wounded in wars exploded. A partial and rather ineffective solution was only achieved when the Red Cross was founded.

Capital Marktes during WWll

Bruno S. Frey (with Marcel Kucher) examines in the paper “History as Reflected in Capital Markets: The Case of World War ll”, how movements in bond prices can be linked to historical events. He finds in an econometric analysis’ of price movements of bonds issued by five European governments, which were traded on the Swiss bourse between 1928 and 1948, that most events to which historians attach great importance are reflected in price changes for bonds. However, some major events are not reflected, for example Germany’s capitulation in 1945. Frey and Kucher find for this particular case that bond prices already had changed much earlier when the Allied powers decided at Yalta that they would only accept a total capitulation at all fronts. This indicates an interesting friction between historians’ ex post evaluation of events and the price setting parameters for traders as an ex ante evaluation. Frey and Kucher discuss the potential insight for historical research using market data and econometric analysis. They refer to efficient market theory in order to identify three central advantages of capital market data to other data sources: (a) Data is correctly recorded since bourses are quasi-public. What is assessed is the decision makers expectations about the future; (b) Investors tend to evaluate the situation carefully because they are engaged with their own money; (c) Financial markets usually exhibit a high predictive power, due to marginal traders.

Economics of Terrorism

Bruno Frey opposes, with his economic considerations for terrorism, the dominant paradigm in politics and academia seeking to counteract terrorism with harsh deterrence and strict anti-terrorism laws. Frey’s “Economic Approach to Terrorism” rests on rational choice theory but focusses its attention on the relative cost of violent and non-violent means of action.

Economics of Art and Culture

In his research, Frey deals with the organization of theaters, operas and museums, as well as with the yield of investments in pieces of art. He argues that – in comparison to other investments – the latter are financially less worthwhile. Such investments are nevertheless made because of the mental yield that accrues.

In the economic analysis of museums, Frey finds that museums often do not include the value of their collection in their cost structure and thereby disregard the opportunity costs of works of art, which consist in the value as an alternative investment. Frey moreover analyzes that publicly administered museums likely pay little regard to the number of visitors, amenities and the overall profitability of the museum.

On the demand side, Frey sheds light on the major problems when measuring the social value of culture. Examples are the “education value”, the “prestige value”, or the mere “existence value” of cultural institutions for citizens.

Self-plagiarism

During 2010 and 2011, Bruno Frey, along with coauthors Benno Torgler and David Savage, published five articles concerning the Titanic disaster in five different academic journals. Most peer-reviewed journals have editorial policies prohibiting the publication of work that has already been published in other journals, and requiring that authors make a good faith effort to cite prior works. At the end of April 2011, blogs accused Bruno Frey and his coauthors Benno Torgler and David Savage of "self-plagiarism" and of not having cited works of other scholars on the same issue.

On May 3, 2011, editor of the Journal of Economic Perspectives David Autor wrote a public letter to Bruno Frey stating that "there is very substantial overlap between these articles and your JEP publication. Indeed, to my eye, they are substantively identical." Pointing out that the other articles were not cited, Autor said that "we find your conduct in this matter ethically dubious and disrespectful to the American Economic Association, the Journal of Economic Perspectives and the JEP's readers." Frey accepted the accusations and offered his apologies to David Autor in a public response, saying, "[i]t was a grave mistake on our part for which we deeply apologize. It should never have happened. This is deplorable."

For this offence, Bruno Frey, Benno Torgler, and David Savage were placed on a list of self-plagiarism offenders at Research Papers in Economics. A project FreyPlag was started in August 2011 to reveal self-plagiarism by Frey and his co-authors, and the Swiss and German press reported. After a report of an ad hoc committee of the University of Zurich found them guilty of misconduct, the university did not renew his contract.

Academic honours