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. dd says:

    If he’s working part-time, he’s assured some pay and has the option to work part-time elsewhere as well to supplement his income. If he’s out of work completely, there’s no guarantee he can find full-time work elsewhere immediately. Seems reasonable to me.

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  2. Tom R. says:

    Keeping a consistent utility function here is interesting….is there one that explains this without also predicting that he’d volunteer to work for free? I suppose if he’s expecting negative real interest rates, he’d prefer future compensation to present.

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  3. Maltheos says:

    First off if his benefits package is worth anything on a yearly basis this will result in a net receipt of more money to him( based upon a typical benefits package, the benefits are likely worth ~50% of his annual salary, so this is likely a choice between 2/3 of a years pay( as cash only is given not benefits in all likelihood) yrs pay now( taxable at a higher rate) vs 2 years at (effectively) 2/3 pay( half pay + benefits) with the cost being half time teaching. In general the more his benefits are worth to him the better the deal the extended work is. If he is in the proper age range this may also work well with the timing of the Medicare/Social Security availability.

    If he actually enjoys teaching, or finds it useful for other reasons this it full of win. Additionally there are non-financial benefits to being a member of the faculty — access to research facilities, prestige, and standing for publication. Further, if he has work that is in process, this will allow a graceful conclusion as opposed to a rush job( or leaving it incomplete)

    Additionally, if he intends to seek other employment following this, this will definitely offer him the ability to seek employment with better standing.( it is easier to change jobs, then to seek from unemployment) Even if he intends to retire after this assignment ends, the ability to gracefully transition is very valuable.

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  4. DaveyNC says:

    He gets to keep teaching and thereby keep active. In the meantime, he gets more time to seek a full time position if that is what he wants. Very important these days to stay in the work force because apparently, many organizations are explicitly not interested in hiring someone who is unemployed.

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  5. mg says:

    How many years has he been working? (One additional year could improve SS benefit slightly). How much is being contributed to retirement each year by his institution? Also, how are his health benefits affected by retirement?

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  6. Dan says:

    An equally interesting question is why does the school offer that option?

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  7. Mark D. says:

    If the phased plan contained 2 years of health insurance vs. zero for the immediate buyout, you can bet that your colleague certainly factored that into the decision – at which point the monetary value is far from equal (especially if your colleague is older and more likely to be subject to the arbitrary “pre-existing condition” clauses of most HMOs if and when moving to a new plan)

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  8. Jim says:

    I’m actually sitting in a behavioral economics class right now, and my posting during class should give you an idea of what I think about the subject. Your friend’s decision is irrational IF you assume (as my behavioral professor does) that an individual is only rational if he is maximizing his material wealth. However, I think this is a misinterpretation of the rationality assumption and I think you could pretty easily model a situation in which your friend gets intrinsic value from working. This is pretty much what Steven was saying, but if being in college has taught me anything, it is why use 8 words when you can use 100?

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