Organizational Economics Meeting

December 10 and 11, 2010 -
Robert Gibbons, MIT and NBER, with the assistance of Elizabeth Martinez of Massachusetts General Hospital, Organizers

Jonathan S. Skinner and Douglas O. Staiger, Dartmouth College and NBER
Technology Diffusion and Productivity Growth in Health Care (NBER Working Paper No. 14865)

Inefficiency in the U.S. health care system often has been characterized as "flat of the curve" spending, providing little or no incremental value. Skinner and Staiger draw on macroeconomic models of diffusion and productivity to better explain the empirical patterns of outcome improvements in heart attacks (acute myocardial infarction). In these models, small differences in the propensity to adopt technology can lead to wide and persistent productivity differences across countries -- or in this case, hospitals. Using U.S. Medicare data on survival and factor inputs for 2.8 million heart attack patients during 1986-2004, they find that the speed of diffusion for highly efficient and often low-cost innovations -- such as beta blockers, aspirin, and primary reperfusion -- explain a large fraction of persistent variations in productivity, and swamp the impact of traditional factor inputs. Holding technology constant, the marginal gains from spending on heart attack treatments appear positive but quite modest. Hospitals that raised their rate of technology diffusion (the "tigers") during the period 1994-5 to 2003-4 experienced outcome gains four times those of hospitals with diminished rates of diffusion (the "tortoises"). Survival rates in low-diffusion hospitals lag by as much as a decade behind high-diffusion hospitals, raising the question of why some hospitals (and the physicians who work there) adopt so slowly.

Gadi Barlevy, Federal Reserve Bank of Chicago, and Derek Neal, University of Chicago and NBER
Pay for Percentile

Barlevy and Neal propose an incentive pay scheme for educators that links compensation to the rankings of their students within appropriately defined comparison sets. The researchers show that under certain conditions, this scheme induces teachers to allocate socially optimal levels of effort to all students. Moreover, because this scheme uses only ordinal information, it allows education authorities to employ completely new assessments at each testing date, without ever having to equate various assessment forms. This approach removes incentives for teachers to teach to a particular assessment form, and it eliminates opportunities to influence reward pay by corrupting either the equating process or the scales used to report assessment results. Education authorities can use the incentive scheme proposed here while employing a separate no-stakes assessment system to track student achievement levels and to create cardinal measures of school and teacher performance.

Rocco Macchiavello, Harvard University, and Ameet Morjaria, Harvard Kennedy School
The Value of Relationships: Evidence from a Supply Shock to Kenya Flower Exporters

When contracts are incomplete, firms facilitate trade by developing relationships in which future rents deter short-term opportunism. Macchiavello and Morjaria study how future rents assure contractual performance in the Kenya flower export sector. Based on revealed preferences, they compute a lower bound on the value of the rents for the exporters in each relationship: the value of a relationship must be greater than the revenues foregone by not selling on the spot-market at higher prices. At a time of a large, negative, and unanticipated supply shock induced by an intense episode of ethnic violence, exporters prioritize the most valuable relationships. In turn, compliance at the time of the shock correlates positively with relationship survival, future trade volumes, prices, and relationship value. The evidence is consistent with the latter two classes of models, particularly reputation ones, when interpreted under the light of models of: 1) relational contracts, 2) informal insurance, 3) repeated games with imperfect monitoring, and 4) reputation.

Philippe Jehiel, PSE, and Andrew F. Newman, Boston University Loopholes: Social Learning and the Evolution of Contract Form

Jehiel and Newman explore a simple model of contractual evolution via "loopholes." Young principals, who are uncertain about what actions will be feasible for their agents, get limited observations of earlier agents' behavior, and rationally update their beliefs about feasible actions. When old, they offer contracts that deter only the harmful actions they deem sufficiently likely to exist; their agents then cheat if it is both feasible and undeterred by the contract, that is, if there is a loophole. In a loophole equilibrium, principals who observe cheating close loopholes when they offer contracts. But loophole-free contracts deter all cheating, thereby conveying little information about feasible actions to other principals, who may then come to the view that cheating is unlikely enough to choose what prove to be loophole-y contracts. The result is cycling of contract types that alternately deter and encourage undesired behavior, yielding heterogeneity across principals. There are also bureaucratic equilibria in which contracts deter behavior that is actually infeasible. Depending on whether principals sample concurrently or historically, population dynamics in a loophole equilibrium may display aggregate cycling or convergence to a stationary, nondegenerate distribution of contracts.

C. Kirabo Jackson, Northwestern University and NBER, and Henry S. Schneider, Cornell University
Do Social Connections Reduce Moral Hazard? Evidence from the New York City Taxi Industry

Jackson and Schneider investigate the role of social networks in aligning the incentives of agents in settings with incomplete contracts. They study the New York City taxi industry, where taxis often are leased and lessee-drivers have worse driving outcomes than owner-drivers because of moral hazard associated with incomplete contracts. The researchers find that: 1) drivers leasing from members of their country-of-birth community exhibit significantly reduced effects of moral hazard; 2) network effects appear to operate via social sanctions; and 3) network benefits can help to explain the industry organization in terms of which drivers and owners form business relationships.

Kenneth Ayotte, Northwestern University Law School, and Henry Hansmann, Yale University
A Nexus of Contracts Theory of Legal Entities

Ayotte and Hansmann seek to expand on current theories of the firm by focusing on the question of why firms are so commonly organized as legal entities that are formally distinct from their owners. The authors develop the idea that a legal entity permits an entrepreneur to create a firm as a bundle of contracts that can be transferred to someone else, but only if they are transferred together. This bundled assignability allows for balancing several potentially conflicting interests. First, the entrepreneur who assembles the contracts wants liquidity - that is, the ability to transfer the contracts and to cash out her interest in them. Second, counterparties to the firms' contracts -- the firms' employees, suppliers, creditors, and customers - want protection from opportunistic transfers that will reduce the value of the performance they have been promised. Third, the entrepreneur wants long-term commitments from the firms' counterparties to prevent holdup of her noncontractible investments in the bundle. By providing that transfers of equity interests in the entity generally will not be considered assignments of the firms' contracts, organizational law provides a flexible tool that permits easy modulation of the tradeoff among these interests. The authors examine a sample of 287 supply and lease contracts and find that bundled assignability is a common feature of these contracts, and that legal entities are the most common means of defining bundles.