The theory of Incentives 3

Chapter 4 Moral Hazard: The Basic Trade-offs

1. Introduction

↑ adverse selection: delegation of task → information gap when (a) has private info relevant for efficient volume of trade
↓ moral hazard: delegation of task → after delegation (a) choose actions which affect value of trade = performance ← unobservable info, thus cannot control + conflict/different objective function

endogenous uncertainty: random output = (a) effort + realization of pure luck ← (p) can only design a contract based on (a) observable performance, which is only a noisy signal of (a) action => non-observability of the agent’s effort = hard to mapping effort with performance => affects the cost of implementing a given action

model: a risk averse  (a) can choose a binary effort + the production level can be either high or low → properties of incentive schemes which induce a positive and costly effort → incentive constraint + participation constraint = incentive feasible contracts → (p) prefers the one which implements the positive level of effort at minimal cost → second-best cost of implementing effort > the first-best cost when effort is verifiable, but trades-off the benefit for inducing a given effort ← as incentive constraint 

[1] when (a) is risk neutral + a contract contingent on production: incentivized by rewards and penalties => non-observability of effort not affect efficiency = first-best outcome ← as long as (a) expected payment satisfies ex ante participation constraint => make (a) residual claimant for the gains from trade (and to grasp from him this gain through an ex ante lump-sum transfer)

[2] when (a) is risk neutral + no wealth to be punished => a new limited liability constraint must be satisfied => (p) must give up some ex ante rent to the agent => trade-off (limited liability rent extraction|efficiency) → a downward distortion in the expected volume of trade

[3] when (a) is risk averse => inducing effort requires to let the agent bear some risk = give (a) risk premium => conflict( incentive | the participation constraints) =>  trade-off (insurance|efficiency) ← (p) must distort the complete information risk sharing agreement to induce effort provision

2. The Model

[1] Effort and Production

for (a):
e = a costly effort, in {0, 1}
ψ(e) = a disutility from exerting effort e, ψ(0) = ψ0 = 0 and ψ(1) = ψ1 = ψ
U = u(t) − ψ(e), u'(·) > 0, u”(·) < 0 |sometimes, use the inverse function h = u^-1

˜q = stochastic production level, {q_, q¯}, with ¯q − q_ = ∆q > 0,
stochastic influence of effort on production = possibility:
Pr(˜q = q¯ / e=0) = π0 | Pr(˜q = ¯q / e=1) = π1, with π1 > π0,  ∆π = π1 − π0

[2] Incentive Feasible Contracts

˜q, {q_, q¯} → t(˜q), {t_, t ¯}
risk neutral (p):
V1 = π1(S(¯q) − t ¯) + (1 − π1)(S(q_) − t_) | if (a) makes a positive effort
V0 = π0(S(¯q) − t ¯) + (1 − π0)(S(q_) − t_) | if (a) makes no effort

=> for (p): [1] whether to induce [a] to exert effort or not, [2] if induce, which incentive contract

incentive constraint: (inducing exerting positive effort)
[ π1u(t¯) + (1 − π1)u(t_) ] − ψ  ≥ [ π0u(t ¯) + (1 − π0)u(t_) ]
→ (a) faces [1] the lottery which gives t ¯|t_ with probability π1 |1− π1 or [2] not the lottery which yields t ¯ |t_ with probability π0|1- π0, but save ψ

participation constraint: (exerting positive effort under outside opportunity utility level)
π1u(t¯) + (1 − π1)u(t_) − ψ ≥ 0
← ensured at the ex ante stage = before the realization of the production shock

Time sequence:
(p) offers a contract {t_, t¯} → (a) accepts or refuses → (a) exerts effort or not → ˜q is realized → contract executed

[3] The Complete Information Optimal Contract

effort is observable and verifiable
(p) wants to induce effort:
max {(t_,t ¯ )}  π1(S¯ − t¯) + (1 − π1)(S_ − t_)

only participation constraint matters since (a) can be force to exert effort (otherwise punishment)
π1u(t¯) + (1 − π1)u(t_) − ψ ≥ 0

=> −π1 + λπ1u'(t¯∗ ) =0
=> −(1 − π1) + λ(1 − π1)u'(t_∗ ) =0

=> λ = 1/u'(t_∗) = 1/u'(t¯∗) > 0
=> t∗ = t ¯∗ = t_∗.

→ (a) obtains full insurance from the risk neutral principal → receives transfer t∗ whatever the state of nature
=> t∗ = h(ψ) → just enough to cover the disutility of effort = first-best cost CFB of implementing the positive effort level

=> V1 = π1S¯ + (1 − π1)S_ − h(ψ)
=> V0 = π0S¯ + (1 − π0)S_ , if (p) decided to let the agent exert no effort → make a zero payment whatever
=>> inducing effort if V1≥V0 → ∆π∆S ≥ h(ψ)| expected gain of effort (B) ≥ first best cost

4.3 Risk Neutrality and First-Best Implementation 

4.4 The Trade-Off between Limited Liability Rent Extraction and Efficiency

4.5 The Trade-off between Insurance and Efficiency

[1] optimal transfers

[2] optimal second-best fffort

4.6 More than Two Level of Performance

[1] limited liability

[2] risk aversion

4.7 Informative Signals to Improve Contracting

[1] informativeness of signals

[2] more comparisons among information structures

現代日本経済システムの源流

関する一次資料:「経済安定本部 戦後経済政策資料」、「戦後経済史」、「経済企画庁二十年小史」、「現代日本経済の展開-経済企画庁三十年史」、「昭和財政史-終戦から講和まで」、「資料・戦後日本の経済構想」、「通商産業政策史」、「経済安定本部史研究」

1。岡崎哲二, 奥野正寛(1993)、「現代日本経済システムの源流」、第4章、企業システム。

  •  戦前の日本企業は、むしろアングロサクソんてきなcorporate governance structureを備えていた。有力な株主となりうる大資産家が企業に対する資金を提供し、モニタリングシステムを構築する。銀行は大きな役割を果たしておらず、また労働者の企業に対する定着度は低く、深くコミットしていなかった。
  •  戦時期に政府は産業報国会を通じた経営を参加、株主の権限を制限し、内部昇進者を励み、また銀行と通じた資金供給のための制度を整備した。その結果、企業は典型的なsoft budget constraintに直面した。
  •  戦後復興期の変化は、戦時期と基本的方向を共有し、戦時期に形成されたcorporate governance structureに基づいて、銀行・経営者・労働者による企業再建経済復興を図る。過剰雇用を維持する企業はコストの上昇による損失に対して短期的に赤字融資で対処し、事後的に公定価格引き上げないし補助金増額を受ける。また銀行がモニタリングのincentiveを十分にもたず。
  •  ドッジラインはsoft budgetの条件を解消した、銀行はモニターとして、企業に対する矯正的行動を強めた。製品市場における企業間競争が復活し、過剰雇用の解消に伴う労働争議は、統制経済から市場経済への移行にあたっての摩擦現象ということができる。

 

2。岡崎哲二(1994)、「戦後経済復興期の政府・企業間関係—産業合理化政策と企業」

  •  ドッジラインによって日本経済が市場経済化した当初、重化学工業分野の関連する複数の産業の高コストと小規模性が各産業の合理化投資を相互に制約し、日本経済は企業の私的なインセンティプだけでは脱却困難な悪循環に入っていた。
  •  この問題を解決する上で大きな役割を果たしたのは、戦時及び戦後数年の計画・統制経済の経験を通じて形成された政府と企業間の密接な情報交換仕組みとそれに基づいて実施された産業政策であった。(鉄鋼業と石炭鉱業の合理化計画調整)
  •  産業合理化審議会は、悪循環を抜けるための政府民間の協力の場となり、合理化投資計画を定式化、後ほどの民間企業の積極的な合理化計画を導いた。

 

3。岡崎哲二(1998)、「戦後日本の産業政策と政府組織」

  •  戦後日本の産業政策は、時期によって異なった実態的・組織的環境の下で立案
  •  市場経済移行前の日本経済は深刻なエネルギー·原材料不足に直面しており、そのため額産業は希少な資源を取り合うという強い競合関係に立っていた。そのため、産業相互の水平的コーディネーションの効果(補完性)は小さく、上位組織による集権的な調整が有効になる。この意味で、経済安定本部を頂点とする集権的な政府組織が実行した傾斜生産方式は非戦略産業を犠牲にしながら戦略産業の生産を回復されるが、市場経済移行前の実態条件に適合していた。

 

4。橋下寿朗(1996)、「日本企業システムの戦後史」

  •  日本的な企業システムの形成を検討する際に、極めて重要な時期は戦後改革からいわゆる統治が撤廃され、市場経済に復帰した時期の前後数年である。
  •  日本はアメリカのインパクト(経済面とサブシステム)を受け、また異なった初期条件(高い金利、高い資源価格、低い所得、平等な所得配分、安い賃金)に基づいて形成された慣行である。このうち平等度高い所得配分以外は、戦前以来の要因である。そして、改革と学習は初期条件の制約を受けて修正された。この修正の過程が日本的企業システム形成であった。

 

Appendix 1

経済安定本部と当時経済政策の背景について

1。経済安定本部は強い権限を把握した。

  •  - 占領当局は「各省に優越する」臨時の新しい官庁をとして経済安定本部を設置し
  •  - インフレと生産減退の深刻化により、経済安定本部を頂点とする政府組織の集権化を徹底する方針が実施され(S22/04)、企画を担当する領域の拡大および、省庁事務の推進、政策実施の監視、経済統制の励行という新しい役割の追加が行われた。

2。この時期の経済政策の目標は主に生産能力の回復、過剰労働力の解決、需給の不均衡の是正、インフレの抑制。

  •  - 第2次世界大戦による生産設備の破壊に因って、終戦直後に戦前の10分の1、その後も3分の1前後の水準で推移した生産能力の低さのため生じた需給の不均衡への対応、復員手当や戦時補償等の支出が拡大したこと等に起因するインフレへの対応、そして、600万人強ともいわれる海外からの大量復員と軍需工場からの動員解除による労働力過剰状態への対応が政策対応の柱とされた。
  •  - 生活、生産活動に直接必要と認められるもの以外の預金の引出しを禁止するいわゆる預金封鎖、「金融緊急措置」(S22)の実施、「物価統制令」、「臨時物資需給調整法」、「金融機関資金融通準則」、「貿易等臨時措置法」に基づく統制の実施等。
  •  - 石炭と鉄鋼を中心とする少数重要産業への重点的な資金配分による集中増産とその他産業への波及を図っていく「傾斜生産方式」の実施。
  •  - ドッジ・ライン(ドッジ政策路線)による 1949 年度予算における超均衡予算(単年度予算収支が黒字であるだけでなく過去の負債も減少させるもの)の実施。
  •  - また、ドッジ・ラインにより(「企業三原則」、復金の新規融資停止、価格・配給統制の撤廃)、1949年から50年にかけて経済統治の解除と市場経済への移行が急速に進み。

Frontier papers on Vertical Integration

Vertical Integration

Institutional determinants of vertical integration in China JPH Fan, J Huang, R Morck, B Yeung – Journal of Corporate Finance, 2014

 

Lafontaine, Francine and Margaret Slade. 2007. “Vertical Integration and Firm Boundaries: The Evidence.” Journal of Economic Literature 45: 629-85. 

Lafontaine, Francine and Margaret Slade. 2012. “Contracting Between Firms: Evidence.” in THO

*Acemoglu, Daron, Philippe Aghion, Claire Lelarge, John Van Reenen, and Fabrizio Zilibotti. 2007. “Technology, Information and the Decentralization of the Firm.” Quarterly Journal of Economics 122: 1758-99.

Determinants of vertical integration: financial development and contracting costs D Acemoglu, S Johnson, T Mitton – The Journal of Finance, 2009

Business groups as hierarchies of firms: determinants of vertical integration and performance C Altomonte, A Rungi – 2013

Contracts

Contracts and the Division of Labor D Acemoglu, P Antras, E Helpman – 2005

Contracts and technology adoption D Acemoglu, P Antràs… – The American economic …, 2007

Firms, contracts, and trade structure P Antràs – The Quarterly Journal of Economics, 2003

Incomplete contracts and the product cycle P Antràs – The American Economic Review, 2005

Franchise 

The dynamics of franchise contracting: Evidence from panel data F Lafontaine, KL Shaw – Journal of political Economy, 1999

Targeting managerial control: evidence from franchising F Lafontaine, KL Shaw – RAND Journal of Economics, 2005 (291)

 

 

Continue reading “Frontier papers on Vertical Integration”

Economics of Organization – lecture syllabus + introduction

A graduate course in the Economics of Organization in University of Connecticut by Richard N. Langlois 2015

The structure of production.

 Transaction-cost economics: overview. .

 The Coasean approach.

 Moral hazard, monitoring, and measurement costs.

Asset specificity.

Property rights theory (old and new).

Summary (so far) and prospect.

Ownership.

  Dispersed knowledge and monitoring.

 Production costs redux: Economic capabilities.

  • Harold Demsetz, The Economics of the Business Firm. New York: Cambridge University Press, 1995, chapters 1 and 2.
  • Sidney G. Winter, “On Coase, Competence, and the Corporation,” Journal of Law, Economics, and Organization 4(1): 163-180 (Spring 1988), reprinted in Oliver E. Williamson and Sidney G. Winter, eds., The Nature of the Firm. New York: Oxford University Press, 1991.
  • Richard N. Langlois and Nicolai J. Foss, “Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization,” Kyklos 52(2): 201-218 (1999).
  • David J. Teece, Gary Pisano, and Amy Shuen, “Dynamic Capabilities and Strategic Management,” Strategic Management Journal 18(7): 509-533 (August 1997).
  • Richard R. Nelson and Sidney G. Winter, An Evolutionary Theory of Economic Change. Cambridge: the Belknap Press, 1982, chapters 4 and 5.
  • Edith Penrose, The Theory of the Growth of the Firm. Oxford: Basil Blackwell, 1959. (Oxford edition, 1995.)
  • G. B. Richardson, “The Organisation of Industry,” Economic Journal 82(327): 883-896 (1972).
  • David J. Teece, “Economies of Scope and the Scope of the Enterprise,” Journal of Economic Behavior and Organization 1(3): 223 (1980).
  • David J. Teece, “Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing, and Public Policy,” Research Policy 15: 285-305 (December 1986).
  • C. K. Prahalad and Gary Hamel, “The Core Competence of the Corporation,” Harvard Business Review, May-June 1990, pp. 7991

Organization and economic change.

 Modular systems and standards.

The old economy and the new economy.

Business Groups.

 

 

———————————————————————————————

Robert Gibbons’s Ph.D. Course Organizational Economics in MIT 2011 (also see a 2009 MIT open course with* symbol on required readings, a 2015 on Five Lectures on Internal Organization focusing on Politics, Authority, Culture, and Management)
THO: R. Gibbons and J. Roberts (eds.), The Handbook of Organizational Economics. Princeton, NJ: Princeton University Press.

PhD Course in Organizational Economics in Yale by Florian Ederer has a very similar structure with Gibbons, with some required readings starred

PART I: FOUNDATIONS

1. Agency Theory for Organizational Economics

* Bolton, Patrick and Mathias Dewatripont. 2005. Contract Theory. Cambridge, MA: MIT Press. Chapters 4, 8, and 10.
Gibbons, Robert. 2005. “Incentives Between Firms (and Within).” Management Science 51: 2-17 (Sections 1-4).
Gibbons, Robert and John Roberts. 2012. “Incentives in Organizations.” in THO
Malcomson, James. 2012. “Relational Incentive Contracts.” in THO

1.1 Formal Incentive Contracts (1.1.1 Risk Aversion; 1.1.2 Multi-task Models; 1.1.3 Multi-agent Models)
*Baker, George. 1992. “Incentive Contracts and Performance Measurement.” Journal of Political Economy 100: 598-614.
1.2 Relational Incentive Contracts
*Levin, Jonathan. 2003. “Relational Incentive Contracts.” American Economic Review 93: 835-57.
1.3 No Incentive Contracts (“Career Concerns”)

2. Elemental Theories of the Firm

* Bolton, Patrick and Mathias Dewatripont. 2005. Contract Theory. Cambridge, MA: MIT Press, Chapters 11 and 12.
* Gibbons, Robert. 2005. “Four Formal(izable) Theories of the Firm?” Journal of Economic Behavior and Organization 58: 202-247 (Sections 1-3).
Segal, Ilya and Michael Whinston. 2012. “Property Rights.”in THO
Tadelis, Steven and Oliver Williamson. 2012. “Transaction-Cost Economics.”in THO
Coase, Ronald. 1937. “The Nature of the Firm.” Economica, 4: 386-405.
Williamson, Oliver 1971. “The Vertical Integration of Production: Market Failure Considerations.” American Economic Review, 61: 112-23.
Alchian, Armen and Harold Demsetz. 1972. “Production, Information Costs, and Economic Organization.” American Economic Review, 62: 316-25.

2.1 Incentive Systems
*Azoulay, Pierre. 2004. “Capturing Knowledge Within and Across Firm Boundaries: Evidence from Clinical Development.” American Economic Review 94: 1591-1612.
2.2 Adaptation
*Januszewski Forbes, Silke and Mara Lederman. 2009. “Adaptation and Vertical Integration in the Airline Industry.” American Economic Review, 99: 5, 1831-1849.
2.3 Property Rights
*Woodruff, Christopher. 2002. “Non-contractible Investment and Vertical Integration in the Mexican Footwear Industry.” International Journal of Industrial Organization 20: 1197-1224.
*Baker, George and Thomas Hubbard. 2003. “Make Versus Buy in Trucking: Asset Ownership, Job Design, and Information.” American Economic Review 93: 551-572.

2.4 Rent Seeking
*Joskow, Paul. 1987. “Contract Duration and Relationship-Specific Investment: Empirical Evidence from Coal Markets.” American Economic Review, 77:168-85.

(3. Delegation and Communication) in Yale’s lecture
3.1 Delegation
*Bolton, Patrick and Mathias Dewatripont. 2005. Contract Theory. Cambridge, MA: MIT Press, Chapter 12.
*Aghion, Philippe and Jean Tirole. 1997. “Formal and Real Authority in Organizations.” Journal of Political Economy 105:1-29.
*Acemoglu, Daron, Philippe Aghion, Claire Lelarge, John Van Reenen, and Fabrizio Zilibotti. 2007. “Technology, Information and the Decentralization of the Firm.” Quarterly Journal of Economics 122: 1758-99.
3.2 Disclosure
*Milgrom, Paul. 2008. “What the Seller Won’t Tell You: Disclosure Policies and Market Outcomes.” Journal of Economic Perspectives, 22 (2): 115-131.
*Che, Yeon-Koo and Navin Kartik. 2009. “Opinions as Incentives.” Journal of Political Economy, October 2009.
*Shin, Hyun Song 2003.“Disclosures and Asset Returns,” Econometrica, 71 (1): 105-133.

3.3 Communication
*Crawford, Vincent and Joel Sobel. 1982. “Strategic Information Transmission,” Econometrica, 50 (6): 1431- 1451.
*Dessein, Wouter. 2002. “Authority and Communication in Organizations.” Review of Economic Studies 69: 811-38.

PART II: WITHIN FIRMS

3. Decision-Making in Organizations

* Gibbons, R. (2010). “Inside Organizations: Pricing, Politics, and Path Dependence.” Annual Review of Economics 2: 337-65
* 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.

Bolton, Patrick and Mathias Dewatripont. 2012. “Authority in Organizations.” in THO
Camerer, Colin and Roberto Weber. 2012. “Experimental Organizational Economics.”in THO (Sections V and VI)
Hermalin, Benjamin. 2012a. “Leadership and Corporate Culture.” in THO
March, James and Herbert Simon. 1958. Organizations. New York, NY: John Wiley & Sons.
Cyert, Richard and James March. 1963. A Behavioral Theory of the Firm.
Englewood Cliffs, NJ: Prentice-Hall.
Arrow, Kenneth. 1974. The Limits of Organization. New York: W.W. Norton & Co.

3.1 Team Theory and Garbage Cans
3.2 Authority and Power
— Allocation of Authority
— Implementing Authority
3.3 Politics and Influence
*Prendergast, Canice. 1993. “A Theory of ‘Yes Men.’” American Economic Review 83: 757-70.
*Dessein, Wouter. 2002. “Authority and Communication in Organizations.” Review of Economic Studies 69: 811-38.

— Committees
*Visser, Bauke and Otto Swank. 2007. “On Committees of Experts.” Quarterly Journal of Economics 122: 337- 72.
3.4 Social Relations
*Battaglini, Marco, Roland Bénabou, and Jean Tirole. 2005. “Self-control in peer groups.” Journal of Economic Theory 123: 105-34.
*Charness, Gary, Luca Rigotti, and Aldo Rustichini. 2007. “Individual Behavior and Group Membership.” American Economic Review 97: 1340-52.

— Peer Effects
*Ichino, Andrea and Giovanni Maggi. 2000. “Work Environment and Individual Background: Explaining Regional Shirking Differentials in a Large Italian Firm.” Quarterly Journal of Economics 115: 1057-90.
*Falk, Armin and Andrea Ichino. 2005. “Clean Evidence on Peer Effects.” Journal of Labor Economics 24: 39- 57.
*Mas, Alex and Enrico Moretti. 2007. “Peers at Work.” American Economic Review 99: 112-45.
3.5 Culture and Language
*Rob, Rafael, and Peter Zemsky. 2002. “Social Capital, Corporate Culture, and Incentive Intensity.” Rand Journal of Economics 33: 243-57
*Carlin, Bruce and Simon Gervais. 2009: “Work Ethic, Employment Contracts, and Firm Value.” Journal of Finance 64:2, 785-821
*Weber, Roberto and Colin Camerer. 2003. “Cultural Conflict and Merger Failure: An Experimental Approach.” Management Science 49: 400-15.
*Cremer, Jacques, Luis Garicano, Andrea Prat. 2007. “Language and the Theory of the Firm.” Quarterly Journal of Economics 122: 373-407.

3.6 Leadership
*Hermalin, Benjamin. 1998. “Toward an Economic Theory of Leadership: Leading By Example.” American Economic Review 88: 1188-1206.
*Bertrand, Marianne and Antoinette Schoar. 2003. “Managing with Style: The Effect of Managers on Firm Policies.” Quarterly Journal of Economics 118: 1169-1208.
*Van den Steen, Eric. 2005. “Organizational Beliefs and Managerial Vision.” Journal of Law, Economics, and Organization 21: 256-83. 

4. Employment in Organizations

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.
Baron, James and David Kreps. 2012. “Employment as an Economic and a Social Relationship.” in THO
Ichniowski, Casey and Kathryn Shaw. 2012. “Insider Econometrics: A Roadmap to Estimating Empirical Models of Organizational Performance.” in THO
Lazear, Edward and Paul Oyer. 2012. “Personnel Economics.” in THO
Waldman, Michael. 2012. “Theory and Evidence on Internal Labor Markets.” in THO

4.1 Pay for Performance
— Basic Theory and Evidence
— Gaming
— CEO Pay
— Tournaments
— Subjectivity
— Career Concerns
— The Ratchet Effect
— Intrinsic Motivation and Reciprocity
4.2 Job Assignments & Job Design
4.3 Skill Development
4.4 Networks and Demography
4.5 Employment Systems
4.6 Careers in Organizations

5. Structures and Processes in Organizations

Brynjolfsson, Erik and Paul Milgrom. 2012. “Complementarity in Organizations.”  in THO
Garicano, Luis and Timothy Van Zandt. 2012. “Hierarchies and the Division of Labor.”  in THO
Gertner, Robert and David Scharfstein. 2012. “Resource Allocation within Firms.” in THO
Gibbons, Robert and Rebecca Henderson. 2012. “Relational Contracts, Managerial Practices and Organizational Capabilities.”in THO
Hermalin, Benjamin. 2012b. “Economic Models of Corporate Governance.”in THO
Mookherjee, Dilip. 2012. “Incentives in Hierarchies.”in THO

5.1 Models of Hierarchy
— Information Processing
— Resource Allocation
— Monitoring
— Problem Solving
— Decision Rights
5.2 Delegation
5.3 Organizational Design
— Partnerships
— Contingencies and Complementarities
5.4 Routines, Production, and Capabilities
5.5 Knowledge Management and Product Development
5.6 Growth and Change

PART III: BETWEEN FIRMS?

6. The Boundary of the Firm Revisited

Gibbons, Robert. 2005. “Four Formal(izable) Theories of the Firm?” Journal of Economic Behavior and Organization 58: 202-247 (Sections 4 and 5).
Lafontaine, Francine and Margaret Slade. 2007. “Vertical Integration and Firm Boundaries: The Evidence.” Journal of Economic Literature 45: 629-85.
Bresnahan, Timothy and Jonathan Levin. 2012. “Vertical Integration and Market Structure.” in THO
Hansmann, Henry. 2012. “Ownership and Organizational Form.” in THO
Kornhauser, Lewis and Bentley MacLeod. 2012. “Contracts Between Legal Persons.” in THO
Lafontaine, Francine and Margaret Slade. 2012. “Contracting Between Firms: Evidence.” in THO
Macher, Jeffrey and Barak Richman. 2008. “Transaction Cost Economics: An Assessment of Empirical Research in the Social Sciences.” Business and Politics 10: 1-63.
David, Robert and Shin-Kap Han. 2004. “A Systematic Assessment of the Empirical Support for Transaction Cost Economics.” Strategic Management Journal 25: 39-58.
* Gibbons, Robert. 2010. “Transaction-Cost Economics: Past, Present, and Future?” Scandinavian Journal of Economics 112: 263-88.

6.1 Vertical Integration: Classic Evidence and Commentary

Monteverde, Kirk and David Teece. 1982. “Supplier Switching Costs and Vertical Integration in the Automobile Industry.” Bell Journal of Economics 13:206-13.
Anderson, Erin and David Schmittlein. 1984. “Integration of the Sales Force: An Empirical Examination.” Rand Journal of Economics 15: 385-95.
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 Organization 1: 33-80.
Masten, Scott, James Meehan, and Edward Snyder. 1991. “The Costs of Organization.” Journal of Law, Economics, and Organization 7: 1-25.
Klein, Benjamin. 1988. “Vertical Integration as Organizational Ownership: The Fisher BodyGeneral Motors Relationship Revisited.” Journal of Law, Economics, and Organization 4: 199- 213.
Coase, Ronald. 2000. “The Acquisition of Fisher Body by General Motors.” Journal of Law and Economics 43: 15-31. Klein, Benjamin. 2000. “Fisher-General Motors and the Nature of the Firm.” Journal of Law and Economics 43: 105-41.
Helper, Susan, John Paul MacDuffie, and Charles Sabel. 2000. “Pragmatic Collaborations: Advancing Knowledge While Controlling Opportunism.” Industrial and Corporate Change 9: 443-88.

Commentary:
Demsetz, Harold. 1988. “The Theory of the Firm Revisited.” Journal of Law, Economics and Organization 4: 141-61.
Williamson, Oliver. 2002. “The Theory of the Firm as Governance Structure: From Choice to Contract.” Journal of Economic Perspectives 16: 171-95.
Whinston, Michael. 2003. “On the Transaction Cost Determinants of Vertical Integration.” Journal of Law, Economics, and Organization 19: 1-23.
Baker, George and Ricard Gil. 2012. “Clinical Papers in Organizational Economics.” in THO

6.2 Vertical Integration: Recent Theory and Evidence

Weber, Katherine Seger, and Linda Hill. 1995. “Rudi Gassner and the Executive Committee of BMG International (A).” Harvard Business School Case #9-494-055.
Magnani, Dianna, and Cynthia Montgomery. 2001. “PepsiCo’s Restaurants.” Harvard Business School Case #9-794-078.
Langlois, Richard, and Paul Robertson. 1989. “Explaining Vertical Integration: Lessons from the American Automobile Industry.” Journal of Economic History XLIX: 361-75.
Bolton, Patrick, and Michael Whinston. 1993. “Incomplete Contracts, Vertical Integration, and Supply Assurance.” Review of Economic Studies 60: 121-48.
Argyres, Nicholas. 1996. “Evidence on the Role of Firm Capabilities in Vertical Integration Decisions.” Strategic Management Journal 17: 129-150.
Mullin, Joseph, and Wallace Mullin. 1997. “United States Steel’s Acquisition of Great Northern Ore Properties: Vertical Foreclosure or Efficient Contractual Governance?” Journal of Law, Economics, and Organization 13:74-100.
Poppo, Laura and Todd Zenger. 1998. “Testing Alternative Theories of the Firm: Transaction Cost, Knowledge-Based, and Measurement Explanations for Make-or-Buy Decisions in Information Services.” Strategic Management Journal 19: 853-77.
González-Díaz, Manuel, Benito Arruñada, and Alberto Fernández. 2000. “Causes of subcontracting: evidence from panel data on construction firms.” Journal of Economic Behavior and Organization 42: 167-87.
Baker, George, Robert Gibbons, and Kevin J. Murphy. 2002. “Relational Contracts and the Theory of the Firm.” Quarterly Journal of Economics 117: 39-83.
Woodruff, Christopher. 2002. “Non-contractible Investment and Vertical Integration in the Mexican Footwear Industry.” International Journal of Industrial Organization 20: 1197-1224.
Baker, George and Thomas Hubbard. 2003. “Make Versus Buy in Trucking: Asset Ownership, Job Design, and Information.” American Economic Review 93: 551-572.
Nickerson, Jackson and Brian Silverman. 2003. “Why Aren’t All Truck Drivers OwnerOperators? Asset Ownership and the Employment Relation in Interstate for-Hire Trucking.” Journal of Economics and Management Strategy 12: 91-118.
Nickerson, Jackson and Brian Silverman. 2003. “Why Firms Want to Organize Efficiently and What Keeps Them from Doing So: Inappropriate Governance, Performance, and Adaptation in a Deregulated Industry.” Administrative Science Quarterly 48: 433-65.
Baker, George and Thomas Hubbard. 2004. “Contractibility and Asset Ownership: On-Board Computers and Governance in U.S. Trucking.” Quarterly Journal of Economics 119: 1443-79.
Matouschek, Niko. 2004. “Ex Post Inefficiencies in a Property Rights Theory of the Firm.” Journal of Law, Economics, and Organization 20: 125-47.
Azoulay, Pierre. 2004. “Capturing Knowledge Within and Across Firm Boundaries: Evidence from Clinical Development.” American Economic Review 94: 1591-1612.
Andrabi, Tahir, Maitreesh Ghatak, and Asim Ijaz Khwaja. 2006. “Subcontractors for tractors: Theory and evidence on flexible specialization, supplier selection, and contracting.” Journal of Development Economics 79: 273-302.
Gil, Ricard. 2007. “’Make-or-Buy’ in Movies: Integration and Ex-post Renegotiation.” International Journal of Industrial Organization 25: 643-56.
Baldwin, Carliss. 2008. “Where do transactions come from? Modularity, transactions, and the boundaries of firms.” Industrial and Corporate Change 17: 155-95.
Gil, Ricard. 2009. “Revenue Sharing Distortions and Vertical Integration in the Movie Industry.” Journal of Law, Economics, and Organization 25: 579-610.
Forbes, Silke and Mara Lederman. 2009. “Adaptation and Vertical Integration in the Airline Industry.” American Economic Review 99: 1831-49.
Novak, Sharon and Scott Stern. 2009. “Complementarity Among Vertical Integration Decisions: Evidence from Automobile Product Development.” Management Science 75: 1257-85.
Forbes, Silke and Mara Lederman. 2010. “Does Vertical Integration Affect Firm Performance? Evidence from the Airline Industry.” Forthcoming, Rand Journal of Economics.
Levin, Jonathan and Steven Tadelis. 2010. “Contracting for Government Services: Theory and Evidence from U.S. Cities.” Forthcoming, Journal of Industrial Economics.

6.3 Formal Contracts Between Firms
— Franchising
6.4 Relational Contracts Between Firms
6.5 Organizations and Industry Structure

7. Corporate Strategy

Aoki, Masahiko. 1988. Information, Incentives and Bargaining in the Japanese Economy. New York, NY: Cambridge University Press.
Roberts, John. 2004. The Modern Firm: Organizational Design for Performance and Growth. Oxford: Oxford University Press, Chapters 5 and 6.
Azoulay, Pierre and Josh Lerner. 2012. “Technological Innovation and Organizations.” in THO
Menard, Claude. 2012. “Hybrid Modes of Organization: Alliances, Joint Ventures, Networks, and other ‘strange’ animals.” in THO
Roberts, John and Garth Saloner. 2012. “Strategy and Organization.” in THO

7.1 Divisionalization and Conglomerates
7.2 Beyond Divisionalization: Matrix, Network, and Other Organizational Forms
7.3 Resource Allocation and Transfer Pricing
7.4 Joint Ventures, Alliances, and Other Hybrids
— Hybrids and Innovation
7.5 Multinational Corporations, International Trade, and FDI
7.6 Organizations and Industry Dynamics

PART IV: BEYOND FIRMS

8. Institutions

Aoki, Masahiko. 2001. Toward a Comparative Institutional Analysis. Cambridge, MA: MIT Press.
Dixit, Avinash. 2009. “Governance Institutions and Economic Activity.” American Economic Review 99: 5-24.
Banerjee, Abhijit, Rema Hanna, and Sendhil Mullainathan. 2012. “Corruption as a Problem of Public and Private Governance.” in THO
Press. Moe, Terry. 2012. “Public Bureaucracy and the Theory of Political Control.” in THO

8.1 Communities
8.2 Agencies
8.3 States

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In Northwestern

Organizational Economics I: Organizations and Markets by Michael Powell: Syllabus

Organizational Economics II: Dynamics and Productivity Differences by Daniel Barron: Syllabus

Continue reading “Economics of Organization – lecture syllabus + introduction”

Firm in Agency theory: Classics

Agency Problems and the Theory of the Firm EF Fama – Journal of political economy, 1980 (13401)

The theory of the firm BR Holmstrom, J Tirole – Handbook of industrial organization, 1989 (1419)

Multitask principal-agent analyses: Incentive contracts, asset ownership, and job design B Holmstrom, P Milgrom – Journal of Law, Economics, & Organization, 1991 (6381)

The firm as an incentive system B Holmstrom, P Milgrom – The American Economic Review, 1994 (1457)

The boundaries of the firm revisited B Holmström, J Roberts – The Journal of Economic Perspectives, 1998 (1327)

The firm as a subeconomy B Holmstrom – Journal of Law, Economics, and organization, 1999 (713)

Others in agency and incentive theory:

Aggregation and linearity in the provision of intertemporal incentives B Holmstrom, P Milgrom – Econometrica: Journal of the Econometric Society, 1987 (3161)

Short-term contracts and long-term agency relationships D Fudenberg, B Holmstrom, P Milgrom – Journal of economic theory, 1990 (634)

Agency theory: An assessment and review KM Eisenhardt – Academy of management review, 1989 (11865)

The economics of modern manufacturing: Technology, strategy, and organization P Milgrom, J Roberts – The American Economic Review, 1990 (3341)

Complementarities and fit strategy, structure, and organizational change in manufacturing P Milgrom, J Roberts – Journal of accounting and economics, 1995 (2539)

Firm in Property Rights Theory

Toward a theory of property rights H Demsetz – Classic Papers in Natural Resource Economics, 1974 (8414)

(some introductions on the works of Hart)

Takeover bids, the free-rider problem, and the theory of the corporation SJ Grossman, OD Hart – The Bell Journal of Economics, 1980 (3560)

An analysis of the principal-agent problem SJ Grossman, OD Hart – Econometrica: Journal of the Econometric Society, 1983 (3671)

The costs and benefits of ownership: A theory of vertical and lateral integration SJ Grossman, OD Hart – Journal of political economy, 1986 (11338)

The theory of contracts OD Hart, B Holmstrm – 1986  (2056)

Incomplete contracts and renegotiation O Hart, J Moore – Econometrica: Journal of the Econometric Society, 1988 (2135)

Property Rights and the Nature of the Firm O Hart, J Moore – Journal of political economy, 1990 (6546)

Some reviews on PRT (also on tc theory) in:

Assessing the property rights and transaction-cost theories of firm scope MD Whinston – The American Economic Review, 2001 (162)

On the transaction cost determinants of vertical integration MD Whinston – Journal of Law, Economics, and Organization, 2003 (381)

The boundaries of the firm revisited B Holmström, J Roberts – The Journal of Economic Perspectives, 1998 (1327)

The firm as a subeconomy B Holmstrom – Journal of Law, Economics, and organization, 1999 (713)

Some others:

Ownership and control in outsourcing to China: Estimating the property-rights theory of the firm RC Feenstra, GH Hanson – The Quarterly Journal of Economics, 2005 (475)

The stakeholder theory of the corporation: Concepts, evidence, and implications T Donaldson, LE Preston – Academy of management Review, 1995 (10622)

 

Firm in a strategy/knowledge sense

Why do firms differ, and how does it matter? RR Nelson – Strategic management journal, 1991 (2709)

What firms do? Coordination, identity, and learning B Kogut, U Zander – Organization science, 1996 (3624)

Toward a knowledge‐based theory of the firm RM Grant – Strategic management journal, 1996 (16122)

A firm as a knowledge-creating entity: a new perspective on the theory of the firm I Nonaka, R Toyama, A Nagata – Industrial and corporate …, 2000 (1396)

Knowledge specialization, organizational coupling, and the boundaries of the firm: why do firms know more than they make? S Brusoni, A Prencipe, K Pavitt – Administrative science …, 2001 (1516)

Do firms learn to create value? The case of alliances BN Anand, T Khanna – Strategic management journal, 2000 (2317)

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Why do firms differ, and how does it matter? RR Nelson – Strategic management journal, 1991 (2709)

economists: discretionary firm differences as the result of general economic difference (the contexts in which firms operate: technology, factor prices, product markets differ) + interested in general economic performance of an industry or nation ← a theoretical view of economic activity and role of firms (as players in a multi actor economic game) / particular behavior or performance of individual firms

management: discretionary firm differences exist
→ the result of different strategies that are used to guide decision making at various levels in firms (though not mean knowing what firm is and why strong or weak )

evolutionary economic theory : firm differences matter importantly to economists’ concerns:
– role of firm differences in the evolution of technology and modes of organizing economic activity
=>> competition ← incentives and pressures to keep prices with minimal feasible costs and to keep firms operating at low costs + exploring new potentially better ways of doing things (Schumpeter remarked that former was trivial)

=> firm diversity is an essential for economic progress:
monopoly, or tight oligopoly with strong barriers to entry as a serious economic problem ← such structures permit a large gap between price and costs + they are unlikely to generate the variety of new routines + the attendant shifts in resource allocation on which economic progress depends
= dynamic capabilities view of firms by scholars in the strategy field

 

Strategic/Interfirm Alliance (management literatures)

Effective interfirm collaboration: how firms minimize transaction costs and maximize transaction value JH Dyer – Strategic management journal, 1997 (2459)

The relational view: Cooperative strategy and sources of interorganizational competitive advantage JH Dyer, H Singh – Academy of management review, 1998 (12078)

Creating and managing a high-performance knowledge-sharing network: the Toyota case JH Dyer, K Nobeoka – Strategic management journal, 2000 (4252)

The role of trustworthiness in reducing transaction costs and improving performance: Empirical evidence from the United States, Japan, and Korea JH Dyer, W Chu – Organization science, 2003 (1352)

Learning and protection of proprietary assets in strategic alliances: Building relational capital P Kale, H Singh, H Perlmutter – Strategic management journal, 2000 (3398)

Alliance capability, stock market response, and long‐term alliance success: the role of the alliance function P Kale, JH Dyer, H Singh – Strategic Management Journal, 2002 (1952)

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Network location and learning: The influence of network resources and firm capabilities on alliance formation R Gulati – Strategic management journal, 1999 (3003)

Strategic networks R Gulati, N Nohria, A Zaheer – Strategic management journal, 2000 (5297)

Do firms learn to create value? The case of alliances BN Anand, T Khanna – Strategic management journal, 2000 (2317)

Interorganizational alliances and the performance of firms: A study of growth and innovation rates in a high-technology industry TE Stuart – Strategic management journal, 2000 (2105)

Don’t go it alone: Alliance network composition and startups’ performance in Canadian biotechnology JAC Baum, T Calabrese, BS Silverman – Strategic management journal, 2000

Alliance management as a source of competitive advantage RD Ireland, MA Hitt, D Vaidyanath – Journal of management, 2002 (1476)

Do formal contracts and relational governance function as substitutes or complements? L Poppo, T Zenger – Strategic management journal, 2002 (2893)

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Inter-firm networks: antecedents, mechanisms and forms A Grandori, G Soda – Organization studies, 1995

 

日本企業における参入、存続と退出

平成不況期における日本企業の存続•退出と企業組織 — ハザ一ド.モデルを用いた企業の生存分析 — 藤井孝宗 木村福成 三田学会雑誌 2001

Globalizing Activities and the Rate of Survival: Panel Data Analysis on Japanese Firms Fukunari Kimura, Takamune Fujii NBER Working Paper No. 10067 2003

日本経済における企業新陳代謝の推移について ──新企業の参入・衰退企業の退出が経済全体の利潤率に与えた影響とその原因の分析── 中尾武雄