Organizational Economics

December 4-5, 2015
Robert S. Gibbons of MIT, Organizer

Sylvain Chassang, Princeton University, and Juan M. Ortner, Boston University

Collusion in Auctions with Constrained Bids: Theory and Evidence from Public Procurement

Chassang and Ortner study the mechanics of cartel enforcement and its interaction with bidding constraints in the context of repeated procurement auctions. Under collusion, bidding constraints weaken cartels by limiting the scope for punishment. This yields a test of collusive behavior exploiting the counter-intuitive prediction that introducing minimum prices can lower the distribution of winning bids. The model's predictions are borne out in procurement data from Japan, where the researchers find considerable evidence that collusion is weakened by the introduction of minimum prices.

Daron Acemoglu, MIT and NBER, and Alex Wolitzky, MIT

Sustaining Cooperation: Community Enforcement vs. Specialized Enforcement (NBER Working Paper No. 21457)

Acemoglu and Wolitzky introduce the possibility of direct punishment by specialized enforcers into a model of community enforcement. Specialized enforcers need to be given incentives to carry out costly punishments. The authors' main result shows that, when the specialized enforcement technology is sufficiently effective, cooperation is best sustained by a "single enforcer punishment equilibrium," where any deviation by a regular agent is punished only once, and only by enforcers. In contrast, enforcers themselves are disciplined (at least in part) by community enforcement. The reason why there is no community enforcement following deviations by regular agent is that such actions, by reducing future cooperation, would decrease the amount of punishment that enforcers are willing to impose on deviators. Conversely, when the specialized enforcement technology is ineffective, optimal equilibria do punish deviations by regular agents with community enforcement. The model thus predicts that societies with more advanced enforcement technologies should rely on specialized enforcement, while less technologically advanced societies should rely on community enforcement. The researchers' results hold both under perfect monitoring of actions and under various types of private monitoring.

John Antonakis and Christian Zehnder, University of Lausanne; Giovanna d'Adda, University of Birmingham; and Roberto Weber, Universität Zürich

"Just Words? Just Speeches?" On The Economic Value of Charismatic Leadership

Despite the importance attributed to leadership in many economic, organizational and political contexts, the topic has received little attention in the economic discipline. In other fields, however, extensive research documents important characteristics of effective leaders, including the ability to influence followers through "charismatic" communication. Antonakis, d'Adda, Weber, and Zehnder report a field experiment that examines whether charisma — in the form of a stylistically different motivation speech — can induce costly effort among workers, and therefore generate higher output for a firm. In their experiment temporary workers have to prepare envelopes for a fundraising campaign conducted on behalf of a hospital. Workers are exposed to speeches that differ in the number of charismatic elements, as well as to varying financial incentives. The authors observe that workers who are given a charismatic speech increase their output on average by about 17% relative to the workers who listen to the standard speech. This performance effect of charisma is statistically significant and comparable in size to the positive effect of performance pay.

Alexander Schmitt and Johannes Van Biesebroeck, K.U.Leuven

Governing Supply Relationships: Evidence from the Automotive Sector

Many empirical studies analyze a firm's make-or-buy decision in an incomplete contracting framework. Transaction Cost Economics has highlighted the role of asset specificity, while the Property Rights Theory stresses the role of the contracting firms' relative marginal contribution to joint surplus creation. Schmitt and Van Biesebroeck show that proxies for both explanatory factors can also be used to distinguish between different ways of organizing an outsourcing relationship. Making the link with the literature on Global Value Chains, the authors' framework predicts that the choice among five possible governance modes depends on three key variables: the complexity of the transaction, its codifiability, and the capability of the supplier. The researchers' evidence using contract information from the automotive industry suggests that not all 'buy' relationships are alike and that the predictive value of their variables goes beyond the make-or-buy distinction.

Laura Alfaro and Pol Antràs, Harvard University and NBER; Davin Chor, National University of Singapore; and Paola Conconi, ECARES

Internalizing Global Value Chains: A Firm-Level Analysis (NBER Working Paper No. 21582)

In recent decades, technological progress in information and communication technology and falling trade barriers have led firms to retain within their boundaries and in their domestic economies only a subset of their production stages. A key decision facing firms worldwide is the extent of control to exert over the different segments of their production processes. Building on Antras and Chor (2013), Alfaro, Antràs, Chor, and Conconi describe a property-rights model of firm boundary choices along the value chain. To assess the evidence, the researchers construct firm-level measures of the upstreamness of integrated and non-integrated inputs by combining information on the production activities of firms operating in more than 100 countries with Input-Output tables. In line with the model's predictions, they find that whether a firm integrates upstream or downstream suppliers depends crucially on the elasticity of demand for its final product. Moreover, a firm's propensity to integrate a given stage of the value chain is shaped by the relative contractibility of the stages located upstream versus downstream from that stage. The results suggest that contractual frictions play an important role in shaping the integration choices of firms around the world.

Francine Lafontaine, University of Michigan

Organizations and Policy

Alexandre Mas, Princeton University and NBER

Why Did CEO Compensation Rise during the Great Depression? The 1934 Securities and Exchange Act and the Ratcheting Effect

Using newly digitized data from the Federal Trade Commission, Mas examines the evolution of executive compensation during the Great Depression, before and after mandated pay disclosure in 1934. He finds that disclosure did not achieve the intended effect of broadly lowering CEO comp ensation. If anything, and in spite of popular outrage against compensation practices, average CEO compensation increased following disclosure relative to the upper fractiles of the non-CEO labor income distribution. Pay disclosure coincided with compression of the CEO earnings distribution. Following disclosure there was a pronounced drop in the residual variance of earnings — computed with size and industry controls — that accounts for over 80 percent of the drop in the overall variance. The author documents a lower pay-to-performance sensitivity and increases in the lower conditional quantiles of the earnings distribution relative to the non-CEO distribution. The evidence suggests an upward "ratcheting" effect whereby lower paid CEOs given the size and industry of their firm experienced gains while well paid CEOs conditional on these characteristics were not penalized. The unconditional maximum of CEO compensation did fall after disclosure, suggesting that disclosure may only have restrained only the most salient and visible wages.

Emily L. Breza and Yogita Shamdasani, Columbia University, and Supreet Kaur, Columbia University and NBER

The Morale Effects of Pay Inequality

The idea that worker utility is affected by co-worker wages has potentially broad implications for the labor market — for example, through wage compression, wage rigidity, firm boundaries, and the distribution of earnings. Breza, Kaur, and Shamdasani use a month-long field experiment with Indian manufacturing workers to test whether relative pay comparisons affect effort and labor supply. In their setting, workers are paid a flat daily wage and organized into distinct product teams. The researchers randomize teams to receive either compressed wages (where all teammates earn the same wage) or heterogeneous wages (where each team member is paid a different wage according to his baseline productivity rank). For a given absolute wage level, workers reduce output by 0.36 standard deviations if they are on a team where they are paid less than their peers. They are also less likely to come to work — giving up 9% of their earnings. These effects strengthen in later weeks. In contrast, workers do not increase output when they are paid more than their peers. The perceived justification for pay differences mediates negative morale effects. Specifically, lower relative pay does not cause effort reductions when co-worker output is highly observable, or when one's higher-paid co-workers are substantially more productive than oneself (in terms of baseline productivity). Finally, performance on endline games indicates that pay disparity reduces team members' ability to cooperate in their own self-interest.

Orie Shelef, Stanford University, and Amy Nguyen-Chyung, University of Michigan

Competing for Labor through Contracts: Selection, Matching, Firm Organization and Investments

Does firm competition for workers lead the best workers to the most productive firms? In a model of of imperfect competition for workers through incentive contracts, Shelef and Nguyen-Chyung highlight that while higher-powered incentives attract better workers, higher-powered incentives can reduce incentives for firm investment in productive resources. Driven by this mechanism, firms may endogenously differentiate and sort higher-ability workers into firms with fewer productive resources. Bringing this idea to a novel matched employer-employee panel with more than 10,000 firms in residential real estate brokerage where the authors observe both worker-specific output and incentive contracts, they first decompose productivity into worker productivity and firm productivity. The researchers find, across all firms and workers, that the best workers do not work at the most productive firms despite complementarity between firm and worker types: firms that are 15% more productive have workers that are 5% less productive. However, within firms that offer the same contracts, better workers do work at more productive firms.
The researchers confirm additional predictions of the model on the equilibrium decisions of firms and of workers. Consistent with the authors' modelling assumptions, worker heterogeneity and preferences limit the effect of incentives on worker sorting. Counterfactuals show that contractual competition meaningfully reduces aggregate productivity by driving better workers to less productive firms. The researchers' work links managerial decisions on incentive contracts and firm investments with labor market competition to explain persistent productivity differences across firms.

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

Allocating Effort and Talent in Professional Labor Markets

In many professional service firms, new associates work long hours while competing in up-or-out promotion contests. Barlevy and Neal's model explores why these firms require young professionals to take on heavy work loads while facing significant risks of dismissal. The researchers argue that the productivity of skilled partners in professional service firms, e.g. law, consulting, investment banking, public accounting, etc, is quite large relative to the productivity of their peers who are competent and experienced but not well-suited to the partner role. Therefore, these firms adopt personnel policies that facilitate the identification of new partners. In the authors' model, both heavy work loads and up-or-out rules serve this purpose. Market participants learn more about new workers who perform more tasks, and when firms replace experienced associates with new workers, they gain the opportunity to identify talented professionals who will have long careers as partners. Both of these personnel practices are costly. However, when the gains from increasing the number of talented partners exceed these costs, firms employ both practices in tandem. Over time, technological developments and evolving roles for specialists in large professional service firms may have shaped work hours and the degree of adherence to strict up or out rules in specific labor markets. The researchers discuss how their model is able to rationalize these developments, and they also present evidence on life-cycle patterns of hours and earnings among lawyers that support key predictions of the model.

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