Organizational Economics

The NBER's Working Group on Organizational Economics met April 20-21 in Cambridge. Working Group Director Robert S. Gibbons of MIT organized the meeting. These researchers' papers were presented and discussed:

Florian Englmaier, Stefan Grimm, and Simeon Schudy, Ludwig Maximilian University of Munich, and David Schindler, Tilburg University

The Effect of Incentives in Non-Routine Analytic Team Tasks — Evidence from a Field Experiment

Despite the prevalence of non-routine analytical team tasks in modern economies, little is known about how incentives influence performance in these tasks. In a field experiment with more than 3000 participants, Englmaier, Grimm, Schindler, and Schudy document a positive effect of bonus incentives on the probability of completion of such a task. Bonus incentives increase performance due to the reward rather than the reference point (performance threshold) they provide. The framing of bonuses (as gains or losses) plays a minor role. Incentives improve performance also in an additional sample of presumably less motivated workers. However, incentives reduce these workers' willingness to "explore" original solutions.

Daniel V. Barron, George Georgiadis, and Jeroen Swinkels, Northwestern University

Optimal Contracts with a Risk-Taking Agent

Consider an agent who can costlessly add mean-preserving noise to his output. To deter such risk-taking, the principal optimally offers a contract that makes the agent's utility concave in output. If the agent is risk-neutral and protected by limited liability, optimal incentives are strikingly simple: linear contracts maximize profit. If the agent is risk averse, Barron, Georgiadis, and Swinkels characterize the unique profit-maximizing contract and show how deterring risk-taking affects the insurance-incentive tradeoff. The researchers extend their model to analyze costly risk-taking and alternative timings, and reinterpret the model as a dynamic setting in which the agent can manipulate the timing of output.

Colleen M. Cunningham, London Business School, and Florian Ederer and Song Ma, Yale University

Killer Acquisitions

Cunningham, Ederer, and Ma demonstrate that incumbent firms acquire innovative targets to discontinue the development of the targets' innovation projects in order to preempt future competition. They call such acquisitions "killer acquisitions." They illustrate the phenomenon using a model with product market competition, innovation, and endogenous acquisition decisions. In the researchers' model incumbent firms have incentives to acquire innovative targets and then terminate the targets' project development when those products have strong replacement effects. This killer acquisition motive is stronger when the acquirer-target product overlap is high and when product market competition is low. Empirically, the researchers exploit the setting of drug development, in which they are able to track detailed project-level development histories of more than 55,000 drug projects. They show that acquired drug projects are less likely to be continued in the development process, and this result is particularly pronounced when the acquired project overlaps with the acquirer's development pipeline and when the acquirer has strong incentives to protect its market power. Cunningham, Ederer, and Ma also show that alternative interpretations such as optimal project selection, organizational frictions, and human capital redeployment do not explain their results. Their findings have implications for antitrust policy, startup exit, and the process of creative destruction.

Diego Battiston, Jordi Blanes, and Tom Kirchmaier, London School of Economics

Face-to-Face Communication in Organisations

Battiston, Blanes, and Kirchmaier study how communicating in person (in addition to electronically) affects team productivity in organisations. Understanding this relation empirically has proven elusive due to measurement and endogeneity issues. The researchers exploit a unique natural experiment in an organisation where workers must transmit complex electronic information to their teammates. For exogenous reasons, workers can sometimes also communicate face-to-face. The researchers show that productivity is higher when face-to-face communication is possible, and that this effect is stronger for urgent and complex tasks, for homogeneous teams, and during high pressure conditions. The researchers highlight the opportunity costs of face-to-face communication and their dependence on organisational slack.

Steven Callander and Nicolas S. Lambert, Stanford University; and Niko Matouschek, Northwestern University

Communication in a Complicated World

Experts play a central role in many economic, political, and social interactions, and the ability of experts to sway decisions in their favor is widely documented. A key ingredient of this ability is the difficulty non-expert decision makers have in de-biasing an expert's advice. For instance, even if you know your mechanic is recommending excessive repairs, how do you know what repair your car really needs? Canonical models of expertise do not capture this property. In canonical representations, expertise consists of a single piece of information and, as a result, advice can be perfectly debiased and experts are unable to sway decisions in their favor. Callander, Lambert, and Matouschek develop an alternative model of expertise, one in which expert knowledge consists of a continuum of correlated states and in which advice can be de-biased only imperfectly, even when advice is hard information. The researchers show that this richer conception of expertise provides the expert with leverage to sway decisions in their favor. Yet to do so, the expert must communicate in a new form, conveying ostensibly redundant beyond a simple recommendation. The researchers show that this power to sway outcomes benefits the expert for any degree of complexity beyond that assumed in canonical models, although peaking for decisions of moderate complexity.

Timothy J. Besley, London School of Economics, and Torsten Persson, Institute for International Economic Studies and NBER

Organizational Dynamics: Culture, Design, and Performance

Besley and Persson examines the two-way interaction between organizational culture and a key aspect of organizational design, namely the choice between centralization and decentralization. They model culture via the share of managers in an organization that adopt one of two managerial types, which affects the way they choose projects and internalize the payoffs of other managers. Using a class of cultural dynamics based on the relative payoffs of each type, the researchers investigate the conditions under which different cultures become dominant. Their general model delivers insights into the interplay between organizational design and culture, the coexistence of different organizational cultures, the emergence of dysfunctional cultures, and organizational resistance to change. Besley and Persson apply special cases of this general framework to the behavior of bureaucracies, firms, and political parties.

Christopher T. Stanton, Harvard University and NBER, and Catherine Thomas, London School of Economics

Experience Markets: An Application to Outsourcing and Hiring

While shopping for a non-standard good or service, a buyer evaluates noisy signals of seller quality. A new buyer, without the benefit of market experience to draw on, puts more weight on each seller's noisy signal of value and therefore perceives alternative sellers as being more differentiated from each other. Stanton and Thomas call a setting like this an "experience market" and analyze how workers submit wage bids in an online market for global outsourced labor where employers have observably different experience levels. Declining wage bids and changing hiring patterns as employers gain experience suggest that new employers are uncertain about their own value for using this labor market and learn about it when interacting with workers. In some experience markets, platforms may find it profitable to subsidize information acquisition, but, in this market, niche positioning without subsidizing wages for new employers is more profitable because the marginal employer encouraged to hire by the subsidy has a low value for the market. The results offer a possible explanation for limited participation in labor services offshoring relative to predictions based on technical feasibility studies.

Decio Coviello, HEC Montreal; Erika Deserranno, Northwestern University; and Nicola Persico, Northwestern University and NBER

Minimum Wage and Worker Productivity: Evidence From A Large US Retailer

Coviello, Deserranno, and Persico study the effect of increasing the statutory minimum wage on worker productivity. Within a workforce of base+commission salespeople from a large US retailer, and using a border-discontinuity research design, the researchers document that a 65 cents increase in the minimum wage increases individual productivity (sales per hour) by 2%. With the help of a model, the researchers seek evidence in favor of three distinct channels through which this productivity gain could arise: a demand increase, an incentive effect due to the change in compensation, and selective termination by the firm. They find evidence only for the second, that is, the compensation scheme channel. Intriguingly, this channel suggests an efficiency wage effect because a lump sum increase in base pay has incentive effects.

Benjamin Enke, Harvard University and NBER

Kinship Systems, Cooperation, and the Evolution of Culture (NBER Working Paper No. 23499)

An influential body of psychological and anthropological theories holds that societies exhibit heterogeneous cooperation systems that differ both in their level of in-group favoritism and in the tools that they employ to enforce cooperative behavior. According to some of these theories, bundles of functional psychological adaptations -- religious beliefs, moral values, negative reciprocity, and emotions -- serve as "psychological police officers" to regulate behavior in social dilemmas across different cooperation regimes. Enke uses an anthropological measure of the tightness of historical kinship systems to study the structure of cooperation patterns and enforcement devices across historical ethnic groups, contemporary countries, ethnic groups within countries, and among migrants. The results document that societies with loose ancestral kinship ties cooperate and trust broadly, which appears to be enforced through beliefs in moralizing gods -- individualizing moral values, internalized guilt, altruistic punishment, and large-scale institutions. Societies with a historically tightly-knit kinship structure, on the other hand, exhibit strong in-group favoritism in behavior and trust levels. This cooperation regime is in turn enforced by communal moral values, emotions of external shame, revenge-taking, and local governance structures. These patterns suggest that various seemingly unrelated aspects of culture are all functional, and ultimately serve the same purpose of regulating economic behavior.

Maria Guadalupe and Maria Lucia Del Carpio, INSEAD

More Women in Tech? Evidence from a Field Experiment Addressing Social Identity

Guadalupe and Del Carpio investigate whether social identity considerations and norms may be driving occupational choices by women. They implement a randomized field experiment to analyze how the self-selection of women into the technology sector changes when they randomly vary the recruitment message to potential applicants to a 5-month software coding program offered only to low income women in Peru and Mexico. In addition to a control message with generic information, in a treatment message we correct misperceptions about expected returns for women and their ability to pursue a career in technology. This de-biasing message doubles the probability of applying (from 7% to 15%). The researchers then analyze the stark differential self-selection patterns for the treatment and the control groups to infer the potential barriers that may explain occupational segregation. They find evidence that both expectations about monetary returns in the sector and a perceived "identity" cost (as reflected by an IAT test and survey measures) of a career in technology operate as barriers. They interpret their results in the light of a Roy model where women are endowed with returns to skill in the technology and services sector, and bear an identity cost of working in technology (à la Akerlof Kranton, 2000). Through a follow up experiment in Mexico DF the researchers are able to rule out alternative explanations for their results and point to what dimensions of the initial treatment matter most. Their results suggest social identity can explain persistent occupational segregation in this setting and point towards policy interventions that may alleviate it.

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