For Spring 2007, the doctoral courses in organizational economics usually taught at Harvard and MIT (Econ 2670 and 14.282, respectively) will be combined and taught at MIT (Mondays and Wednesdays, 10:30-12:00, in E51-361) by George Baker and Bob Gibbons. For Spring 2008, these courses will again be combined, but this time at Harvard and taught by Oliver Hart and Gibbons.
The course will introduce the classic papers and some recent research in organizational economics. The material will be organized into the following modules:
Module 0: Introduction
Module 1: The Boundary of the Firm
Module 2: Decision-Making in Organizations
Module 3: Employment
Module 4: Structures and Processes
Module 5: Beyond Firms
Each class session will cover only a few leading papers. Further readings organized into similar modules can be found at http://web.mit.edu/rgibbons/www/index.html.
We feel it is essential that students be prepared to discuss the readings in class. For this reason, each class session will include 2 or 3 required articles (or one required case study). Students are expected to come to class with a one-page write-up of one of the articles (or the one case) required for that day. An article write-up should cover the paper’s motivation, methods, and results. A case write-up should briefly describe the setting and issues in the case (and, if relevant, propose a decision to be taken) and then discuss in more detail whether the theories and evidence in the course are relevant to the case. We will encourage discussion during each class, building from students’ write-ups.
In addition to the one-page write-ups, there will be a required paper on any topic of interest to you relating to the material in the course. This could be a theoretical or empirical piece. We obviously do not expect you to produce a full (publishable) paper for this assignment, but we would be happy with an insightful, analytical literature review in a particular area or a well thought-out research design on some topic that you might want to work more on in the future. You should plan to discuss your paper ideas with us before mid-April to get our approval. This paper will be due on May 21st.
Grading will be 30% on the one-page write-ups, 30% on class participation, and 40% on the final paper.
We will be available by appointment. Please send us an email to set up a time: email@example.com or firstname.lastname@example.org.
First-year microeconomics (Economics 2010ab or 14.121-4) and either contract theory (Economics 2060 or 14.281) or familiarity and comfort with the following readings.
Holmstrom, Bengt and Paul Milgrom. 1994. “The Firm as an Incentive System.” American Economic Review 84:4, 972-91.
* Holmstrom, Bengt. 1999. “The Firm as a Subeconomy.” Journal of Law Economics and Organizations 15: 74-102.
Klein, Benjamin, Robert Crawford, and Armen Alchian. 1978. “Vertical Integration, Appropriable Rents and the Competitive Contracting Process.” Journal of Law and Economics 21:297-326.
* Williamson, Oliver. 1979. “Transaction Cost Economics: The Governance of Contractual Relations.” Journal of Law and Economics 22: 233-61.
Feb. 14: Classic Evidence (GB)
* Monteverde, Kirk, and David Teece. 1982. “Supplier Switching Costs and Vertical Integration in the Automobile Industry.” Bell Journal of Economics 13: 206-12.
* Masten, Scott. 1984. “The Organization of Production: Evidence from the Aerospace Industry.” Journal of Law and Economics 27: 403-17.
Joskow, Paul. 1985. “Vertical Integration and Long-Term Contracts: The Case of Coal-Burning Electric Generation Plants.” Journal of Law Economics and Organizations 1: 33-80.
Whinston, Michael. 2003. “On the Transaction Cost Determinants of Vertical Integration.” Journal of Law Economics and Organizations 19: 1-23.
Feb. 21: Recent Evidence (GB)
Baker, George and Thomas Hubbard. 2003. “Make versus Buy in Trucking: Asset Ownership, Job Design, and Information.” American Economic Review 93: 551-72.
* Baker, George and Thomas Hubbard. 2004. “Contractibility and Asset Ownership: On-Board Computers and Governance in US Trucking.” Quarterly Journal of Economics 119: 1443 – 1479.
* Woodruff, Christopher. 2002. “Non-contractible Investment and Vertical Integration in the Mexican Footwear Industry.” International Journal of Industrial Organization 20: 1197-1224.
Azoulay, Pierre. 2004. “Capturing Knowledge Within and Across Firm Boundaries: Evidence from Clinical Development.” American Economic Review,94(5), pp. 1591-1612.
Feb. 26: Relational Contracting and Firm Boundaries (BG)
Baker, George P., Robert Gibbons, and Kevin J. Murphy. 2002. "Relational Contracts and the Theory of the Firm." Quarterly Journal of Economics 117: 39-84.
* Weber, Katherine Seger, and Linda Hill. 1995. “Rudi Gassner and the Executive Committee of BMG International (A).” Harvard Business School Case #9-494-055.
Klein, Benjamin and Kevin M. Murphy. 1997. “Vertical Integration as a Self-Enforcing Contractual Arrangement.” American Economic Review 87: 415-20.
Feb. 28: Formal and Relational Contracting – Theory (BG)
* Aghion, Philippe and Jean Tirole. 1994. “On the Management of Innovation.” Quarterly Journal of Economics 109, 1185-1207.
* Bajari, Patrick and Steven Tadelis. 2001. “Incentives Versus Transaction Costs: A Theory of Procurement Contracts.” RAND Journal of Economics, 32:3, 287-307.
Bhattacharyya, Sugato and Francine Lafontaine. 1995. “Double-Sided Moral Hazard and the Nature of Share Contracts.” Rand Journal of Economics 26: 761-81
Klein, Benjamin and Kevin M. Murphy. 1988. “Vertical Restraints as Contract Enforcement Mechanisms.” Journal of Law and Economics 31: 265-97.
Klein, Benjamin. 1996. “Why Hold-ups Occur: The Self-Enforcing Range of Contractual Relationships.” Economic Inquiry 34: 444-63.
Klein, Benjamin. 2000. “The Role of Incomplete Contracts in Self-Enforcing Relationships.” Revue D’Économie Industrielle 92: 67-80
Baker, George, Robert Gibbons and Kevin J. Murphy. 2006. “Contracting for Control.” Unpublished manuscript, USC.
Mar. 5: Formal and Relational Contracting – Evidence (GB)
* Lerner, Josh and Robert Merges. 1998. “The Control of Technology Alliances: An Empirical Analysis of the Biotechnology Industry.” Journal of Industrial Economics 46: 125-56.
* Arruñada, Benito, Luis Garicano, and Luis Vázquez. 2001. “Contractual Allocation of Decision Rights and Incentives: The Case of Automobile Distribution.” Journal of Law, Economics, and Organization 17: 257-84.
* Corts, Kenneth and Jasjit Singh. 2004. “The Effect of Repeated Interaction on Contract Choice: Evidence from Offshore Drilling.” Journal of Law, Economics, and Organization 20: 230-60.
McMillan, John, and Christopher Woodruff. 1999. “Dispute Prevention Without Courts in Vietnam.” Journal of Law, Economics, and Organization 15: 637-58.
Elfenbein, Daniel and Josh Lerner. 2003. “Ownership and control rights in Internet portal alliances, 1995-1999.” RAND Journal of Economics 34: 356-69.
Lafontaine, Francine and Kathryn Shaw. 1999. “The Dynamics of Franchise Contracting: Evidence from Panel Data.” Journal of Political Economy 107: 1041-80.
Lafontaine, Francine and Kathryn Shaw. 2005. “Targeting Managerial Control: Evidence from Franchising.” RAND Journal of Economics 36: 131-50.
Mar. 7: Hybrid Governance Structures (BG)
Richardson, George. 1972. “The Organisation of Industry.” Economic Journal 82: 883-96.
Blois, K. 1972. “Vertical Quasi-Integration.” Journal of Industrial Economics 20: 253-72.
Eccles, Robert. 1981. “The Quasifirm in the Construction Industry.” Journal of Economic Behavior and Organization 2: 335-57.
Hennart, Jean-Francois. 1993. “Explaining the Swollen Middle: Why Most Transactions Are a Mix of ‘Market’ and ‘Hierarchy’.” Organization Science 4: 529-47.
Ménard, Claude. 1996. “On Clusters, Hybrids, and Other Strange Forms: The Case of the French Poultry Industry.” Journal of Institutional and Theoretical Economics 152: 154-83.
* McQuade, Krista and Benjamin Gomes-Casseres. 1992. “Xerox and Fuji Xerox.” Harvard Business School Case #9-391-156.
Module 2: Decision-Making in Organizations (4 sessions)
Background: Gibbons, Robert. 2003. “Team Theory, Garbage Cans, and Real Organizations: Some History and Prospects of Economic Research on Decision-Making in Organizations.” Industrial and Corporate Change 12: 753-87.
Mar. 12: Authority and Power (BG)
* Aghion, Philippe and Jean Tirole. 1997. “Formal and Real Authority in Organizations.” Journal of Political Economy 105:1-29.
* Baker, George, Robert Gibbons, and Kevin J. Murphy. 1999. “Informal Authority in Organizations.” Journal of Law, Economics, and Organization 15: 56-73.
* Foss, Nicolai. 2003. “Selective Intervention and Internal Hybrids: Interpreting and Learning from the Rise and Decline of the Oticon Spaghetti Organization.” Organization Science 14: 331-49.
Rotemberg, Julio. 1993. “Power in Profit-Maximizing Organizations.” Journal of Economics & Management Strategy 2:165-98.
Mar. 14: Politics and Influence (BG)
* Aguilar, Francis and Arvind Bhambri. 1983. “Johnson & Johnson (A), (B).” Harvard Business School Case #384-053 and -054.
March, James. 1962. “The Business Firm as a Political Coalition.” Journal of Politics 24:662-78.
Skaperdas, Stergios. 1992. “Cooperation, Conflict, and Power in the Absence of Property Rights.” American Economic Review 82: 720-39.
Rajan, Raghuram and Luigi Zingales. 2000. “The Tyranny of Inequality.” Journal of Public Economics 76: 521-58.
Milgrom, Paul and John Roberts. 1988. “An Economic Approach to Influence Activities in Organizations.” American Journal of Sociology 94:S154-S179.
Rotemberg, Julio, and Garth Saloner. 1995. “Overt interfunctional conflict (and its reduction through business strategy).” Rand Journal of Economics 26:630-53.
Mar. 19: Culture and Leadership (GB)
* Kreps, David. 1990. “Corporate Culture and Economic Theory.” In J. Alt and K. Shepsle, eds. Perspectives on Positive Political Economy. Cambridge University Press.
* Colin Camerer and Roberto Weber. (forthcoming). “Growing organizational culture in the laboratory.” In Handbook of Experimental Economics Results, eds. Charles R. Plott and Vernon L. Smith. Amsterdam, The Netherlands: Elsevier.
* Weber, Roberto. 2006. “Managing growth to achieve efficient coordination in large groups.” American Economic Review 96:1, 114-126.
Weber, R. Rottenstreich, Y., Camerer, C. and Knez, M. 2001. “The Illusion of Leadership: Misattribution of Cause in Coordination Games.” Organizational Science 12: 582-98.
Cremer, Jacques, Luis Garicano, Andrea Prat. 2006. “Language and the Theory of the Firm.” Forthcoming in Quarterly Journal of Economics 122:1.
Hermalin, Benjamin. 1998. “Toward an Economic Theory of Leadership: Leading By Example.” American Economic Review 88: 1188-1206.
Mar. 21: Interpersonal Authority (guest lecture by Eric Van den Steen)
* Van den Steen, Eric. 2005. “Too Motivated?” Unpublished manuscript, MIT.
* Van den Steen, Eric. 2006. “The Limits of Authority: Motivation vs. Coordination.” Unpublished manuscript, MIT.
* Van den Steen, Eric. 2006. “Interpersonal Authority in a Theory of the Firm.” Unpublished manuscript, MIT.
Marino, Anthony, Matsusaka, John and Zabojnik, Jan. 2006. “Disobedience and Authority.” Unpublished manuscript, USC.
SPRING BREAK Module 3: Employment (6 sessions)
Background: Gibbons, Robert, and Michael Waldman. 1999. “Careers in Organizations: Theory and Evidence.” Chapter 36 in Volume 3B of O. Ashenfelter and D. Card (eds.), Handbook of Labor Economics, North Holland.
Apr. 2: Pay for Performance: Distortion (GB)
Lazear, Edward. 2000. “Performance Pay and Productivity.” American Economic Review 90: 1346-61.
Baker, George. 1992. “Incentive Contracts and Performance Measurement.” Journal of Political Economy 100: 3, 598-614.
* Baker, George. 2002. “Distortion and Risk in Optimal Incentive Contracts.” Journal of Human Resources 37: 4, 728-751.
* Courty, Pascal, and Gerald Marschke. 2004. “An Empirical Investigation of Gaming Responses to Explicit Performance Incentives.” Journal of Labor Economics 22: 23-56.
* Oyer, Paul. 1998. "Fiscal Year Ends and Nonlinear Incentive Contracts: The Effect on Business Seasonality." Quarterly Journal of Economics 113:149-85.
Apr. 4: Pay for Performance: Discretion (GB)
* Baker, George, Robert Gibbons, and Kevin J. Murphy. 1994. “Subjective Performance Measures in Optimal Incentive Contracts.” Quarterly Journal of Economics 109:1125-56.
Che, Yeon-Koo, and Seung-Weon Yoo. 2001. “Optimal Incentives for Teams.” American Economic Review 91: 525-41.
Prendergast, Canice, and Robert Topel. 1996. “Favoritism in Organizations.” Journal of Political Economy 104:958-78.
* Hayes, Rachel and Scott Schaefer. 2000. "Implicit contracts and the Explanatory Power of Top Executive Compensation for Future Performance." RAND Journal of Economics 31: 273-93.
Apr. 9: Pay for Performance: Case Discussions (GB)
* Burtis, Andrew, and John Gabarro. 1996. “Brainard, Bennis & Farrell.” Harvard Business School Case #9-485-037.
* Stewart, James. 1993. “Taking the Dare.” The New Yorker, July 26, 1993: 34-39.
* Roy, Donald. 1952. “Quota Restriction and Goldbricking in a Machine Shop,” American Journal of Sociology 57:427-42.
Apr. 11: Job Assignment, Skill Development, and Networks (BG)
* Waldman, Michael. 1984. “Job Assignment, Signaling, and Efficiency.” RAND Journal of Economics 15:255-87.
Brüderl, Josef, Andreas Diekmann, and Peter Preisendörfer. 1991. “Patterns of Intraorganizational Mobility: Tournament Models, Path Dependency, and Early Promotion Effects.” Social Science Research 20:197-216.
Chiappori, Pierre-André, Bernard Salanié, and Julie Valentin. 1999. “Early Starters versus Late Beginners.” Journal of Political Economy 107: 731-60.
* Prendergast, Canice. 1993. “The Role of Promotion in Inducing Specific Human Capital Acquisition.” Quarterly Journal of Economics 108:523-34.
Acemoglu, Daron, and J. Stephen Pischke. 1998. “Why Do Firms Train? Theory and Evidence.” Quarterly Journal of Economics 113:79-119.
Autor, David. 2001. “Why Do Temporary Help Firms Provide Free General Skills Training?” Quarterly Journal of Economics 116: 1409-48.
* Podolny, Joel, and James Baron. 1997. “Resources and Relationships: Social Networks and Mobility in the Workplace.” American Sociological Review 62:673-93.
Fernandez, Roberto, and Nancy Weinberg. 1997. “Sifting and Sorting: Personal Contacts and Hiring in a Retail Bank.” American Sociological Review 62:883-902.
Fernandez, Roberto, Emilio Castilla, and Paul Moore. 1999. “Social Capital at Work: Networks and Employment at a Phone Center.” American Journal of Sociology 105: 1288-356.
Apr. 18: Employment Systems (BG)
Ichniowski, Casey, Kathryn Shaw, and Giovanna Prennushi. 1997. “The Effects of Human Resource Management Practices on Productivity: A Study of Steel Finishing Lines.” American Economic Review 87:291-313.
Baron, James, and Michael Hannan. 2002. “Organizational Blueprints for Success in High-Tech Start-Ups: Lessons from the Stanford Project on Emerging Companies.” California Management Review 44: 8-36.
* Fast, Norman, and Norman Berg. 1975. “The Lincoln Electric Company.” Harvard Business School Case #376-028.
Milgrom, Paul and John Roberts. 1990. “The Economics of Modern Manufacturing: Technology, Strategy and Organization.” American Economic Review, 80: 511-28
Apr. 23: Careers in Organizations (GB)
* Baker, George, Michael Gibbs, and Bengt Holmstrom. 1994. “The Internal Economics of the Firm: Evidence from Personnel Data.” Quarterly Journal of Economics. 109: 881-919.
* Baker, George, Michael Gibbs, and Bengt Holmstrom. 1994. “The Wage policy of a Firm.” Quarterly Journal of Economics 109: 921-955.
Treble, John, Edwin van Gameren, Sarah Bridges, and Tim Barmby. 2001. “The internal economics of the firm: further evidence from personnel data.” Labour Economics 8: 531-52.
* Gibbons, Robert, and Michael Waldman. 1999. “A Theory of Wage and Promotion Dynamics Inside a Firm.” Quarterly Journal of Economics 114: 1321-58.
Lluis, Stéphanie. 2005. “The Role of Comparative Advantage and Learning in Wage Dynamics and Intrafirm Mobility: Evidence from Germany.” Journal of Labor Economics 23: 725-67.
Gibbons, Robert and Michael Waldman. 2006. “Enriching a Theory of Wage and Promotion Dynamics inside Firms.” Journal of Labor Economics 24: 59-107.
Module 4: Structures and Processes (5 sessions)
Calvo, Guillermo and Stanislaw Wellisz. 1978. “Supervision, Loss of Control, and the Optimum Size of the Firm.” Journal of Political Economy 86: 943-52.
Calvo, Guillermo and Stanislaw Wellisz. 1979. “Supervision, Loss of Control, and the Optimum Size of the Firm.” Journal of Political Economy 86: 943-52.
* Garicano, Luis. 2000. “Hierarchies and the Organization of Knowledge in Production.” Journal of Political Economy 108: 874-904.
* Hart, Oliver and John Moore. 2005. “On the Design of Hierarchies: Coordination Versus Specialization.” Journal of Political Economy 113: 675-702.
Apr. 30: Theory and Evidence on Structure (GB)
Rajan, Raghuram and Luigi Zingales. 2001. “The Firm as a Dedicated Hierarchy: A Theory of the Origins and Growth of Firms.” Quarterly Journal of Economics 116: 805-51.
* Rajan, Raghuram and Julie Wulf. 2006. “The Flattening Firm: Evidence from Panel Data on the Changing Nature of Corporate Hierarchies.” Review of Economics and Statistics. 88: 759-773.
Garicano, Luis and Esteban Rossi-Hansberg. 2006. “Organization and Inequality in a Knowledge Economy.” Quarterly Journal of Economics 121: 1383-1435.
* Garicano, Luis and Tom Hubbard. 2006. “The Return to Knowledge Hierarchies.” Working Paper Chicago GSB.
May 2: Theory and Evidence on Process (BG)
Gertner, Robert, David Scharfstein, and Jeremy Stein. 1994. “Internal Versus External Capital Markets.” Quarterly Journal of Economics 109:1211-1230.
* Stein, Jeremy. 2002. “Information Production and Capital Allocation: Decentralized vs. Hierarchical Firms.” Journal of Finance 57: 1891-1921.
Liberti, Jose and Atif Mian. 2006. “Estimating the Effect of Hierarchies on Information Use.” Working Paper Chicago GSB.
* Holmstrom, Bengt, and Jean Tirole. 1991. “Transfer Pricing and Organizational Form.” Journal of Law, Economics, and Organization 7: 201-28.
* Bertrand, Marianne, Paras Mehta, and Sendhil Mullainathan. 2002. “Ferreting Out Tunneling: An Application to Indian Business Groups.” Quarterly Journal of Economics 117: 121-48.
May 7: Conglomerates and Corporate Strategy (GB)
* Baker, George. 1992. “Beatrice: A Study in the Creation and Destruction of Value.” Journal of Finance 47: 1081-1119.
* Freeland, Robert. 1996. “The Myth of the M-Form? Governance, Consent, and Organizational Change.” American Journal of Sociology 102: 483-526.
* Bartlett, Christopher. 1993. “ABB’s Relays Business: Building and Managing a Global Matrix.” Harvard Business School Case #9-394-016.
Schoar, Antoinette. 2002. “Effects of Corporate Diversification on Productivity.” Journal of Finance 57: 2379-2403.
Villalonga, Belén. 2004. “Diversification Discount or Premium? New Evidence from Business Information Tracking Series Establishment-Level Data.” Journal of Finance 59: 475-502.
Villalonga, Belén. 2004. “Does Diversification Cause the ‘Diversification Discount’?” Financial Management 33: 5-27.
Mullainathan, Sendhil, and David Scharfstein. 2001. “Do Firm Boundaries Matter?” American Economic Review Papers and Proceedings 91: 195-99.
May 9: The Market for Corporate Control (GB)
* Baker, George P., and Karen Wruck. 1989 “Organizational Changes and Value Creation in Leveraged Buyouts: The Case of O.M. Scott & Sons Company.” Journal of Financial Economics 25: 163-190.
* Kaplan, Steven N. 1989. “The Effects of Management Buyouts on Operating Performance and Value.” Journal of Financial Economics 24: 217-254.
Jensen, Michael. and Richard Ruback. 1983. “The market for corporate control.” Journal of Financial Economics 11: 5-50.
Holmstrom, Bengt and Steven Kaplan. 2003. “The State of U.S. Corporate Governance: What’s Right and What’s Wrong?” Journal of Applied Corporate Finance, 15: 8-20.
Module 5: Beyond Firms (1.5 sessions)
May 14: Order without Law; Government Agencies (BG)
Greif, Avner. 1993. “Contract Enforceability and Economic Institutions in Early Trade: The Maghribi Traders’ Coalition.” American Economic Review 83:525-48.
Greif, Avner. 1994. “Cultural Beliefs and the Organization of Society: A Historical and Theoretical Reflection on Collectivist and Individualist Societies.” Journal of Political Economy 102: 912-50.
* Greif, Avner, Paul Milgrom, and Barry Weingast. 1994. “Coordination, Commitment, and Enforcement: The Case of the Merchant Guild.” Journal of Political Economy 102: 745-76.
* Milgrom, P., D. North, and B. Weingast. 1990. “The Role of Institutions in the Revival of Trade: The Law Merchant, Private Judges, and the Champagne Fairs.” Economics and Politics 2: 1-23.