Organizational Economics Meeting

December 7-8, 2012
Robert S. Gibbons of MIT, Organizer

Brigham Frandsen, MIT, and James B. Rebitzer, Boston University and NBER

Structuring Incentives within Organizations: The Case of Accountable Care Organizations

Accountable Care Organizations (ACOs) are a new model for integrated health care delivery created by the Patient Protection and Affordable Care Act. They allow a group of hospitals and providers to jointly contract with the Center for Medicare and Medicaid Services to provide care to a population of Medicare enrollees in an environment that rewards cost-efficiency through global budgeting and group-based pay-for-performance incentives. To improve the precision of performance measures, ACOs are required to have at least 5,000 enrollees. Achieving this scale requires pooling the patient panels of many physicians and this causes a free-riding problem. Working with a stylized model of ACO incentives, Frandsen and Rebitzer establish that the negative effects of free-riding swamp the positive effects of increased precision. They calibrate the model using proprietary performance measures from a very large insurer. Their estimates suggest that even minimally sized ACOs will require unmanageably high stakes incentives. To achieve their goals, ACOs will have to augment under-powered incentives with motivational strategies that complement pay-for-performance. Some of these alternative strategies can only be implemented in conventional integrated organizations, while others may prove workable in hybrid organizational forms that are more congruent with practice patterns in regions where care delivery is currently highly fragmented.

Amitabh Chandra, Harvard University and NBER; Amy Finkelstein, MIT and NBER; Adam Sacarny, MIT; and Chad Syverson, University of Chicago and NBER

Healthcare Exceptionalism? Productivity and Allocation in the U.S. Healthcare Sector

The conventional wisdom in health economics is that large differences in average productivity across hospitals are the result of idiosyncratic institutional features of the healthcare sector which dull the role of market forces that exists in other sectors. Strikingly, however, productivity dispersion across hospitals is, if anything, smaller than in narrowly defined manufacturing industries such as concrete. While this fact admits multiple interpretations, Chandra, Finkelstein, Sacarny, and Syverson also find evidence against the conventional wisdom that the healthcare sector does not operate like an industry subject to standard market forces. In particular, they find that more productive hospitals have higher market shares at a point in time and are more likely to expand over time. For example, a 10 percent increase in hospital productivity today is associated with about 6 percent more patients in 5 years. Taken together, these facts suggest that the healthcare may have more in common with "traditional" sectors than is often assumed.

Roland G. Fryer, Jr, Harvard University and NBER

Injecting Successful Charter School Strategies into Traditional Public Schools: Early Results from an Experiment in Houston

In the 2010-11 school year, five strategies gleaned from practices in successful charter schools -- increased instructional time, a more rigorous approach to building human capital, high-dosage tutoring, frequent use of data to inform instruction, and a culture of high expectations – were implemented in nine of the lowest performing schools in Houston, Texas. Fryer shows that the average impact of these changes on student achievement is 0.277 standard deviations in math and 0.061 standard deviations in reading, which is strikingly similar to reported impacts of attending the Harlem Children's Zone and Knowledge is Power Program schools – two widely lauded charter organizations.

Michael L. Powell, Northwestern University

An Influence-Cost Model of Firm Boundaries and Organizational Practices

Powell explores organizational responses to influence activities -- costly activities aimed at persuading a decision maker. As Milgrom and Roberts (1988) argued, rigid organizational practices that might otherwise seem inefficient (including closed-door policies, flat incentives, defensive information acquisition, and rigid decision-making rules) can optimally arise. If more complex decisions are more susceptible to influence activities, then optimal selection may partially account for the observed correlation between the measured quality of management practices and firm performance reported in Bloom and Van Reenen (2007). Further, the boundaries of the firm can be shaped by the potential for influence activities, providing a theory of the firm based on ex-post inefficiencies. Finally, boundaries and rigid practices interact: non-integrated relationships optimally should be governed by less restrictive rules than relationships within integrated firms.

Lorenzo Caliendo, Yale University and NBER; Ferdinando Monte, Johns Hopkins University; and Esteban Rossi-Hansberg, Princeton University and NBER

The Anatomy of French Production Hierarchies

Caliendo, Monte, and Rossi-Hansberg use a comprehensive dataset of French manufacturing firms to study their internal organization. They first divide the employees of each firm into 'layers' using occupational categories. Layers are hierarchical in that the typical worker in a higher layer earns more, and the typical firm occupies fewer of them. In addition, the probability of adding (dropping) a layer is very positively (negatively) correlated with value added. They then explore the changes in the wages and the number of employees that accompany expansions in layers, output, or markets (by becoming exporters). The empirical results indicate that reorganization, through changes in layers, is key to understanding how firms expand and contract. For example, they fine that firms that expand substantially will add layers and pay lower average wages in all pre-existing layers. In contrast, firms that expand little and do not reorganize will pay higher average wages in all pre-existing layers.

Nicholas Bloom, Stanford University and NBER; Raffaella Sadun, Harvard University and NBER; and John Van Reenen, London School of Economics and NBER

Management as a Technology?

Does management have technological aspects? Bloom, Sadun, and Van Reenen collect data on management practices on over 8,000 firms in 20 countries in the Americas, Europe, and Asia. The United States has the highest average management score and around 30 percent of this is due to more powerful selection effects. Management accounts for up to half of the TFP gap between the United States and other countries. The stronger correlation between firm size (and growth) and management quality is related to greater competition (especially from lower trade barriers) and weaker labor regulation. Using panel data on changes in management practices over time, the authors argue that more intense product market competition generates powerful selection effects and incentivizes incumbent firms to upgrade their management practices. Part of this competition effect is due to changing a firm's (over-optimistic) perceptions of their management quality.

Rema Hanna and Sendhil Mullainathan, Harvard University and NBER, and Joshua Schwartzstein, Dartmouth College

Learning Through Noticing: Theory and Experimental Evidence in Farming

Existing learning models attribute failures to learn to a lack of data. Hanna, Mullainathan, and Schwartzstein model a different barrier. Given the large number of dimensions one could focus on when using a technology, people may fail to learn because they failed to notice important features of the data they possess. The authors conduct a field experiment with seaweed farmers to test a model of "learning through noticing". they find evidence of a failure to notice: on some dimensions, farmers do not even know the value of their own input. Interestingly, trials show that these dimensions are the ones that farmers fail to optimize. Furthermore, consistent with the model, they find that simply having access to the experimental data does not induce learning. Instead, farmers change behavior only when presented with summaries that highlight the overlooked dimensions. They also draw out the implications of learning through noticing for technology adoption, agricultural extension,and the meaning of human capital.

Ulrike Malmendier, University of California at Berkeley and NBER, and Klaus Schmidt, University of Munich

You Owe Me

In many cultures and industries, gifts are given in order to influence the recipient, often at the expense of a third party. Examples include business gifts of firms and lobbyists. In a series of experiments, Malmendier and Schmidt show that, even without incentive or informational effects, small gifts strongly influence the recipient's behavior in favor of the gift giver, in particular when a third party bears the cost. Subjects are well aware that the gift is given to influence their behavior but reciprocate nevertheless. Withholding the gift triggers a strong negative response. These findings are inconsistent with the most prominent models of social preferences. The authors propose an extension of existing theories to capture the observed behavior by endogenizing the "reference group" to whom social preferences are applied. They also show that disclosure and size limits are not effective in reducing the effect of gifts, consistent with their model. Financial incentives ameliorate the effect of the gift but backfire when available but not provided.

Joyee Deb, New York University; Jin Li, Northwestern University; and Arijit Mukherjee, Michigan State University

Relational Contracts with Subjective Peer Evaluations

Deb, Li, and Mukherjee analyze the optimal use of peer evaluations in the provision of incentives within a team, and its interplay with relational contracts. They consider an environment in which the firm pays a discretionary bonus based on a publicly observed team output but may further sharpen incentives by using privately reported peer evaluations. They characterize the optimal contract, and show that peer evaluations can help to sustain relational contracts. Peer evaluations are used when the firm is less patient and the associated level of surplus destruction is small. Moreover, peer evaluation affects a worker's pay only when the public output is at its lowest level and the co-worker sends the worst report. Noticeably, a worker's report does not affect his own pay, as the provision of effort incentives cannot be decoupled from the incentive for truthful reporting of peer performance. To induce the workers both to put in effort and to report truthfully, the firm may find it optimal to neglect signals that are informative of the worker's effort.

Renee Bowen, David Kreps, and Andrzej Skrzypacz, Stanford University

Rules With Discretion and Local Information

To ensure that individual actors take certain actions, community enforcement may be required. This can present a rules-versus-discretion dilemma: it can become impossible to employ discretion based on information that is not widely held, because the wider community is unable to tell whether the information was used correctly. Instead, actions may need to conform to simple and widely verifiable rules. Bowen, Kreps, and Skrzypacz study when discretion -- in the form of permitted exceptions to the simple rule -- can be permitted if the information is shared by the action taker and a second party, who is able to verify for the larger group that an exception is warranted. In particular, they compare protocols where the second party excuses the action taker from taking the action ex ante with protocols where the second party instead forgives a rule-breaking actor ex post. They find that the latter is, in general, useful in a wider variety of circumstances.

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