Organizational Economics

April 25 and 26, 2014
Robert Gibbons of MIT, Organizer

Ricardo Alonso, University of Southern California

Recruitment and Selection in Organizations

Alonso studies employer recruitment and selection of job applicants when productivity is match-specific. Job seekers have private, noisy assessments of their match value and the firm performs noisy interviews. Job seekers' willingness to undergo a costly hiring process will depend both on the wage paid and on the perceived likelihood of being hired, while a noisy interview leads the firm to consider the quality of the applicant pool when setting hiring standards. The author characterizes job seekers' equilibrium application decisions as well as the firm's equilibrium wage and hiring rule. He shows that changes in the informativeness of job seekers' assessments, or changes in the informativeness of the firm's interview, affect the size and composition of the applicant pool and can raise hiring costs when it dissuades applicants. As a result, the firm may actually favor noisier interviews, or prefer to face applicants who are less certain of their person-job/organization fit.

William Fuchs, University of California at Berkeley, and Luis Garicano and Luis Rayo, London School of Economics

Optimal contracting and the organization of knowledge

Fuchs, Garicano, and Rayo study contractual arrangements that support efficient production in a knowledge-intensive economy. Such production is plagued by informational problems, since both the difficulty of the questions posed to experts and the knowledge of those experts are hard to assess. The authors show that spot markets are, in general, not efficient since lemons (in this market, self-employed agents with intermediate knowledge) cannot be appropriately excluded. However, an ex-ante, firm-like contractual arrangement, involving hierarchies in which experts are full residual claimants of output and compensate non-experts via incentive contracts, is guaranteed to deliver the first best (uniquely so whenever some agents are self-employed). This simple characterization of the optimal ex-ante arrangement suggests a rationale for the organization of firms and the structure of compensation in knowledge-intensive sectors.

Anton Kolotilin, University of New South Wales

Optimal Information Disclosure: Quantity vs. Quality

In Kolotilin's model, a sender chooses ex ante how her information will be disclosed to a privately informed receiver who then takes one of two actions. The sender wishes to maximize the probability that the receiver takes the desired action. The sender faces an ex ante quantity-quality tradeoff: sending positive messages more often (in terms of the sender's information) makes it less likely that the receiver will take the desired action (in terms of the receiver's information). Interestingly, the sender's and the receiver's welfare is not monotonic in the precision of the receiver's private information: the sender may find it easier to influence a more informed receiver, and the receiver may suffer from having more precise private information. Necessary and sufficient conditions are derived for full and no information revelation to be optimal.

Florian Englmaier, University of Munich; Andreas Roider, University of Regensburg; and Uwe Sunde, University of St. Gallen

The Role of Communication of Performance Schemes: Evidence from a Field Experiment

In corporate practice, incentive schemes are often complicated even for simple tasks. With a controlled field experiment in a large firm, Englmaier, Roider, and Sunde study a minimally invasive change in the communication of an existing incentive scheme - a reminder of the piece rate at the beginning of a shift - in a multidimensional team production setting with quantity and quality components and experienced agents. While the treatment conveyed no additional material information and left the incentive system unchanged, it led to economically sizable positive effects on quantity and managers' compensation. Improved salience of quantity incentives seems to be the most likely explanation.

Florian Ederer, Yale University, and Alexander Stremitzer, University of California, Los Angeles

Promises and Expectations

Ederer and Stremitzer investigate why people keep their promises in the absence of external enforcement mechanisms and reputational effects. In a controlled economic laboratory experiment, the authors show that exogenous variation of second-order expectations (promisors' expectations about promisees' expectations that the promise will be kept) leads to a significant change in promisor behavior. They document for the first time that a promisor's aversion to disappointing a promisee's expectation leads her to keep her promise. The authors describe a simple theory of lexicographic promise-keeping that is supported by their results and nests the findings of previous contributions as special cases.

Sendhil Mullainathan, Harvard University and NBER, and Sandip Sukhtankar, Dartmouth College

Ownership Structure and Economic Outcomes: The Case of Sugarcane Mills in India

Mullainathan and Sukhtankar examine the effect of firm ownership structure on firm behavior and economic outcomes of upstream suppliers (farmers) using a geographic regression discontinuity design to overcome identification concerns. Their econometric strategy exploits the “command area” zoning system, whereby farmers living within a zone are required to sell sugar to the mill designated to that zone, by surveying farmers at the boundaries of these specified areas. They use two unique sets of data: satellite images merged with digital maps of command area borders to measure crop choices along the borders, and a survey to determine the effects of crop choices on farmer welfare. The authors find that private mills encourage sugarcane production, and that this effect is concentrated on farmers who own less land. Private mills appear to provide more loans for poorer farmers, thereby encouraging them to cultivate cane. Consumption is also relatively higher for poorer farmers living on the private side of the border. Soil testing confirms that results are not driven simply by variation in soil quality.

Eric Van den Steen, Harvard University

Strategy and the Strategist: How it Matters Who Develops the Strategy

Van den Steen studies how strategy, formally defined as "the smallest set of (core) choices to optimally guide the other choices," relates to the strategist, for example, whether an optimal strategy should depend on who is CEO. He first studies why different people may systematically consider different decisions "strategic," with marketing people developing a marketing-focused strategy and favoring the marketing side of business. He derives two rational mechanisms for this outcome: one confidence-based and the other implementation-based. The author then studies why it matters that it is the CEO and important decision makers (rather than an outsider) who formulate the strategy, and he shows that outsider strategists often face a tradeoff between the quality of a strategy and its likelihood of implementation, whereas the CEO's involvement helps implementation because it generates commitment, thus linking strategy formulation and implementation. In some sense, the paper thus explains why strategy is the quintessential responsibility of the CEO. Moreover, it shows that the optimal strategy depends on who is CEO. The author then turns that question around and studies strategy as a tool for exerting leadership, asking when the set of strategic decisions are exactly the decisions a CEO should control in order to give effective guidance. Finally, he shows how a CEO's vision, in the sense of a strong belief, about strategic decisions makes it more likely that the CEO will propose a strategy and that that strategy will be implemented. But strong vision about the wrong decisions, such as subordinate or others' decisions, may be detrimental to strategy and its implementation.

Nicola Lacetera, University of Toronto and NBER; Bradley Larsen, Stanford University; Devin Pope, University of Chicago and NBER; and Justin Sydnor, University of Wisconsin

Bid Takers or Market Makers? The Effect of Auctioneers on Auction Outcomes (NBER Working Paper 19731)

A large body of research has explored the importance of auction design and information structure for auction outcomes. Much less work has been done on the importance of the auction process. For example, in many auctions, auctioneers are present and can impact the process of the auction by varying starting prices, levels of price adjustments, the speed of the auction, the way they interact with auction participants, or their characteristic chant that is intended to excite buyers. Lacetera, Larsen, Pope, and Sydnor explore the importance of the auction process by testing whether auctioneers can have a systematic difference on auction outcomes. The authors analyze more than 850,000 wholesale used car auctions and find large and significant differences in outcomes (probability of sale, price, and auction speed) across auctioneers. The performance heterogeneities are stable across time and correlate with subjective evaluations of auctioneers provided by the auction house. Although the available data here do not allow the authors to conclusively isolate mechanisms, a range of evidence suggests a role for tactics that generate excitement among bidders. Overall, these findings illustrate the complexities of auction environments and how outcomes can be affected by subtle changes in process.

David Cutler, Harvard University and NBER; Jonathan Skinner, Dartmouth College and NBER; Ariel Dora Stern, Harvard University; and David Wennberg, Dartmouth Institute for Health Policy & Clinical Practice

Physician Beliefs and Patient Preferences: A New Look at Regional Variation in Health Care Spending (NBER Working Paper 19320)

There is considerable controversy about the causes of regional variations in health care expenditures. Cutler, Skinner, Stern, and Wennberg use vignettes from patient and physician surveys linked to Medicare expenditures at the level of the Hospital Referral Region to test whether patient demand-side factors or physician supply-side factors explain regional variations in Medicare spending. They find patient demand is relatively unimportant in explaining variations. Physician organizational factors (such as peer effects) matter, but the single most important factor is physician beliefs about treatment: 36 percent of end-of-life spending and 17 percent of U.S. health care spending are associated with physician beliefs that are unsupported by clinical evidence.

Rongzhu Ke, Chinese University of Hong Kong; Jin Li, Northwestern University; and Michael Powell, Northwestern University

Managing Careers in Organizations

Ke, Li, and Powell investigate the optimal personnel policies when careers in organizations are important. Their model extends the classic Shapiro and Stiglitz model to allow for multiple jobs within an organization. Organizations make hiring-, demotion-, promotion-, retention-, and wage-policy decisions. The optimal personnel policies display features of internal labor markets: organizations institute a port of entry and a linear career progression. When promotion opportunities become limited, organizations optimally push out workers at the top. Organizations also become more top heavy. Finally, organizations become less able to respond to outside changes.

Christel Karsten, University of Amsterdam; Ulrike Malmendier, University of California at Berkeley and NBER; and Zacharias Sautner, Frankfurt School of Finance & Management

M&A Negotiations and Lawyer Expertise

Karsten, Malmendier, and Sautner use proprietary data to look into the "black box" of mergers and acquisitions (M&A) negotiations and to shed light on the effects of lawyer expertise on M&A contract design, the bargaining process, and acquisition pricing. Measuring the effects of buyer- relative to seller-lawyer expertise, the authors document that more expertise is associated with more beneficial negotiation outcomes across several dimensions. Lawyer fixed effects and geographic-proximity instruments allow the authors to address concerns about the endogenous allocation of lawyers to deals or clients. The results help explain the importance of league table rankings and the variation in legal fees within the legal M&A services industry.

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