Organizational Economics

April 28-29, 2017
Robert S. Gibbons of MIT, Organizer

Mitchell Hoffman, the University of Toronto and NBER, and Steven Tadelis, the University of California at Berkeley and NBER

How Do Managers Matter? Evidence from Performance Metrics and Employee Surveys in a Firm

Many companies survey employees about their managers yet it is unclear whether this information is, or should be used to evaluate and compensate managers. Using data from a high-tech firm, Hoffman and Tadelis find that survey measures are associated with employees' lower attrition, higher promotions, higher salary increases, and higher engagement, but have only a limited relation to subjective performance scores. The strongest results are on attrition, and different research designs (exploiting new workers joining the firm or exploiting manager moves) support a causal relation of survey-based manager quality to employee attrition. However, managers with better survey scores receive limited benefits in terms of compensation and other rewards.

David Cooper, Florida State; Christos Ioannou, the University of Southampton; and Shi Qi, College of William and Mary

Coordination with Endogenous Contracts: Incentives, Selection, and Strategic Anticipation

Cooper, Ioannaou, and Qi examine the effects of endogenous assignment to incentive contracts on worker productivity. Assignment to high performance pay via a market mechanism is roughly twice as effective as imposing the same contract exogenously. This positive effect is largely offset by a negative effect for workers that endogenously choose low performance pay. The researchers decompose the positive effect of endogenous assignment to high performance pay into effects due to selection and strategic anticipation. They estimate that 73% of the effect is due to selection.

Dalia Marin, the University of Munich; Linda Rousova, European Central Bank; and Thierry Verdier, Paris-Jourdan Sciences Economiques

Do Multinationals Transplant their Business Model? Do Multinationals Transplant their Business Model?

What determines whether or not multinational firms transplant the mode of organisation to other countries? Marin, Rousova, and Verdier embed the theory of knowledge hierarchies in an industry equilibrium model of monopolistic competition to examine how the economic environment may affect the decision of multinational firms about transplanting the business organisation to other countries. The researchers test the theory with original and matched parent and affiliate data on the internal organisation of 660 Austrian and German multinational firms and 2,200 of their affiliate firms in Eastern Europe. The researchers find that three factors stand out in promoting the multinational firm's decision to transplant the business model to the affiliate firm in the host country: a competitive host market, the corporate culture of the multinational firm, and when an innovative technology is transferred to the host country. These factors increase the respective probabilities of organisational transfer by 9 percentage points, 18, and 27 percentage points.

Juan M. Ortner, Boston University, and Avidit R. Acharya, Stanford University

Progressive Learning

Acharya and Ortner study a dynamic principal-agent relationship with adverse selection and limited commitment. They show that when the relationship is subject to productivity shocks, the principal may be able to improve her value over time by progressively learning the agent's private information. She may even achieve her first best payoff in the long-run. The relationship may also exhibit path dependence, with early shocks determining the principal's long-run value. These findings contrast sharply with the results of the ratchet effect literature, in which the principal persistently obtains low payoffs, giving up substantial informational rents to the agent.

Laura Alfaro and Raffaella Sadun, Harvard University and NBER; Nicholas Bloom, Stanford University and NBER; Paola Conconi, Université Libre de Bruxelles; Harald Fadinger, the University of Mannheim; Patrick Legros, Université libre de Bruxelles and Northeastern University; Andrew Newman, Boston University; and John Van Reenen, MIT and NBER

All Together Now: Integration, Delegation and Management

Little is known theoretically, and even less empirically, about the relationship among firm boundary choices, the allocation of decision rights within firms, and their impact on managers' ability to affect firm performance. Alfaro, Bloom, Conconi, Fadinger, Legros, Newman, Sadun, and Van Reenen develop a model in which firms choose which suppliers to integrate, whether to delegate decisions to integrated suppliers or keep them centralized, and the quality of management. The researchers test the predictions of this model using a matched dataset that combines measures of vertical integration, delegation, and management practices for a large set of firms operating in many countries and industries. In line with the model's predictions, they find that integration and delegation co-vary, that this effect vanishes once management is controlled for, and that suppliers from sectors with greater productivity variation are more likely to be integrated with their downstream customers.

Marshall Ganz, Harvard University

Leading Change: Stories, Strategy, and Structure

Claudine M. Gartenberg, New York University; Andrea Prat, Columbia University; and George Serafeim, Harvard University

Corporate Purpose and Financial Performance

Gartenberg, Prat, and Serafeim construct a measure of corporate purpose within a sample of U.S. companies based on approximately 500,000 survey responses of worker perceptions about their employers. The researchers find that this measure of purpose is not related to financial performance. However, high purpose firms come in two forms: firms characterized by high camaraderie between workers and firms characterized by high clarity from management. The researchers document that firms exhibiting both high purpose and clarity have systematically higher future accounting and stock market performance, even after controlling for current performance, and that this relation is driven by the perceptions of middle management and professional staff rather than senior executives, hourly or commissioned workers. Taken together, these results suggest that firms with mid-level employees with strong beliefs in the purpose of their organization experience better performance.

Marta Troya Martinez, New Economic School, and Liam Wren-Lewis, Paris School of Economics

Relational Incentive Contracts with Collusion

This article explores how the possibility of collusion affects relational contracts. Responsibility for a contract is delegated to a supervisor who cares about both production and kickbacks paid by the agents, neither of which are contractible. Troya-Martinez and Wren-Lewis characterize the optimal supervisor-agent relational contract and show that the relationship between joint surplus and production is nonmonotonic. Delegation may benefit the principal when relational contracting is difficult by easing the time inconsistency problem of paying incentive payments. For the principal, the optimal supervisor has incentives that are partially, but not completely, aligned with her own.

Maija Halonen-Akatwijuka and In-Uck Park, the University of Bristol

Coordination of Humanitarian Aid by Mediated Communication

Halonen-Akatwijuka and Park examine a setup where two agents allocate a fixed budget of aid between two equally needy areas. The agents may be biased to one area which is their private information. With no communication aid is allocated inefficiently. Direct communication between the agents in uninformative and cannot resolve the coordination failure. The researchers show that a mediator who filters the information communicated by the agents and reveals it only partially can improve aid coordination.

Ricard Gil, Johns Hopkins University; Myongjin Kim, the University of Oklahoma; and Giorgio Zanarone, CUNEF

The Value of Relational Adaptation in Outsourcing: Evidence from the 2008 shock to the US Airline Industry

In this paper, Gil, Kim, and Zanarone theoretically analyze, and empirically test for, the importance of relational adaptation in outsourcing relationships using the airline industry as case study. In the airline industry, adaptation of flight schedules is necessary in the presence of bad weather conditions. When major carriers outsource to independent regionals, conflicts over these adaptation decisions typically arise. Moreover, the urgency of needed adjustments requires that adaptation be informal and hence enforced relationally. The researchers' model shows that for relational adaptation to be self-enforcing, the long-term value of the relationship between a major and a regional airline must be at least as large as the regional airline's cost of adapting flight schedules across joint routes. Thus, when facing a negative economic shock, the major is more likely to preserve routes outsourced to regional airlines that have higher adaptation costs, and hence higher relationship value. The researchers analyze the evolution of U.S. airline networks around the 2008 financial crisis, and find that consistent with their predictions, routes outsourced to regional networks with worse average weather, and hence higher adaptation costs, were more likely to survive the shock.

Klaus Schmidt, the University of Munich, and Fabian Herweg, the University of Bayreuth

Procurement with Unforeseen Contingencies

The procurement of complex projects is often plagued by large cost overruns. An important reason for these additional costs are flaws in the initial design. If the project is procured with a price-only auction, sellers who spotted some of these flaws have no incentive to reveal them early. Each seller prefers to conceal his information until he received the contract and then renegotiate when he is in a bilateral monopoly position with the buyer. Herweg and Schmidt show that this gives rise to three inefficiencies: inefficient renegotiation, inefficient production and inefficient design. The researchers derive the informationally robust direct mechanism that implements the efficient allocation at the lowest possible cost to the buyer. However, the direct mechanism requires that the buyer knows the set of possible design flaws and their payoff consequences beforehand. The researchers show that this problem can be solved by an indirect mechanism implementing the same allocation at the same cost that does not require any prior knowledge of possible flaws.

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