Buyout Package Bingo: A Reason to Choose More Work for Same Pay?

An example of irrationality? A colleague at another university was offered a buy-out package: a full year’s pay if he would resign/retire at the end of the current semester. At the same time, his school also offered a phased retirement deal: two years at half-pay, with half a usual teaching load.

This economist chose to take the phased retirement, thus choosing the same pay, but teaching four courses over two years instead of no teaching. I think he’s crazy; but I think you can write down a utility function that is consistent with his behavior and violates none of our assumptions about preferences.

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  1. Steven Thacker says:

    The answer is simple. He wants to work.

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    • Mike B says:

      For older workers working does tend to keep one from not dying. Also a university setting has numerous non-monetary rewards such as free food and drink opportunities, events and activities, engaging students and staff, learning opportunities, etc.

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    • Cañada Kid says:

      Precisely that, Mike B. Obviously, to this colleague of Daniel’s, teaching at half the work load for two years, getting X amount of dollars, is worth more than being retired with X money up front. The marginal utility of teaching is greater than what the pay up front, with 0 years work, is worth.

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    • pawnman says:

      Perhaps he felt that working the two years, even at a reduced rate, would give him a better chance at lining up another job if he hadn’t intended to retire yet. The end of the semester is a fairly abrupt end to a career…it could be he has research projects or other loose ends to tie up, or he wants to shepherd his post-doc students through graduation, or at least ensure a seamless hand-off to his successor.

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  2. A says:

    maybe he just enjoys teaching and/or the prestige that comes with it, whats irrational about that?

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  3. econobiker says:

    Does the phased retirement plan allow him to maintain health insurance and allow him to keep his credentials active so he can write under the umbrella of being employed by the university, still access university research resources, get paid to lecture outside of the campus, etc? These type of factors may be the issue of his taking the phased retirement deal versus the immediate buyout.

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  4. Ian Bright says:

    Nice problem.

    From a practical point of view, there may be tax implications that mean the two payments are not equivalent in after tax terms.

    Separately, assuming the academic has long teaching experience, the marginal cost of preparing and running the courses could be very low compared with a full teaching load. Assuming the teacher gets some enjoyment from running the particular courses to be taught (perhaps he/she can choose them) the difference between the marginal cost and marginal benefit of teaching a half load may be greater than teaching either a full load or not teaching at all.

    Further, staying at home with nothing to do may have negative utility. Unemployment is known to be a major source of unhappiness.

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  5. Hoss says:

    Opportunity costs. Maybe he gets to keep teaching the two classes that he absolutely loves to teach – they could be the reason he got into teaching in the first place. You actually can get more enjoyment out of doing something that you love versus just chillin’ at the house.

    Does he maintain his benefits (health care, retirement contributions, etc.) at half-load?

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  6. flacoman91 says:

    If he takes the lump sum, he gets taxed at a higher rate, vs getting the money over a longer period of time?

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  7. Lew Ayotte says:

    How much money will he continue to get from grants over the next two years?

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  8. Cameron says:

    I think there is some utility in staying busy- it always feels better to have something to work on and accomplish; it gives a sense of purpose. (no idea how that can be qualified, however)

    The economist might also really enjoy teaching- and is taking the opportunity to slowly leave the field so as to savor the final year as much as possible.

    Additionally- he might want to take the move slowly so as to moderate the significant life change towards retirement.

    Just a few thoughts

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