Luis Garicano

How an International Agreement on Methane Emissions Can Pave the Way for Enhanced Global Cooperation on Climate Change
Date Posted:Tue, 13 Jun 2023 17:02:39 -0500
Under the 2022 Inflation Reduction Act, the United States has for the first time implemented a methane emissions fee as a backstop to new methane regulations in the oil and gas sectors. The European Union is also implementing methane regulations on fossil energy. Methane is a short-lived but potent greenhouse gas, and reducing it is imperative for limiting global temperature rise to the 1.5?C target. Among the primary sources of methane emissions (including agriculture, fossil fuels, and waste), the oil and gas sectors have the greatest low-cost abatement potential. Clausing and colleagues recommend that the United States and the European Union coordinate their methane reduction policies and eventually impose border adjustments on imports from countries that fail to raise their standards. The aim would be to encourage oil and gas exporters to adopt comparable regulations or, if they fail to do so, pay a border adjustment fee on exports to the two jurisdictions. A US-EU methane border adjustment policy in oil and gas would reduce methane emissions by an estimated 15 to 45 percent worldwide, while having an indiscernible effect on key energy prices US and EU households face. With time, most major energy importers would ideally join the coalition of countries cooperating on both stringent domestic regulations on oil and gas production and border adjustments on any dirty, nonregulating exporters. Such an international agreement would help defuse frictions caused by differing clim

REVISION: Contractual Allocation of Decision Rights and Incentives: The Case of Automobile Distribution
Date Posted:Mon, 23 Jul 2018 03:38:00 -0500
We analyze empirically the allocation of rights and monetary incentives in automobile franchise contracts. All of these contracts substantially restrict the decision rights of dealers and grant manufacturers extensive rights to specify and enforce dealers' duties. The allocation of decision rights and incentive intensity differs across brands, however. This variation is explained by the incidence of moral hazard. In particular, when the cost of dealer moral hazard is higher and the risk of manufacturer opportunism is lower, manufacturers hold more rights to determine the performance required from their dealers and to use mechanisms such as monitoring, termination and monetary incentives to ensure that such performance is provided.

REVISION: Completing Contracts Ex Post: How Car Manufacturers Manage Car Dealers
Date Posted:Sun, 22 Jul 2018 13:59:10 -0500
This article illustrates how contracts are completed ex post in practice and, in so doing, indirectly suggests what the real function of contracts may be. Our evidence comes from the contracts between automobile manufacturers and their dealers in 23 dealership networks in Spain. Franchising dominates automobile distribution because of the need to decentralize pricing and control of service decisions. It motivates local managers to undertake these activities at minimum cost for the manufacturer. However, it creates incentive conflicts, both between manufacturers and dealers and among dealers themselves, concerning the level of sales and service provided. It also holds potential for expropriation of specific investments. Contracts deal with these conflicts by restricting dealers' decision rights and granting manufacturers extensive completion, monitoring and enforcement powers. The main mechanism that may prevent abuse of these powers is the manufacturers' reputational capital.

Blockchain: The Birth of Decentralized Governance
Date Posted:Fri, 11 May 2018 01:01:45 -0500
By allowing networks to split, decentralized blockchain platforms protect members against hold up, but hinder coordination, given that adaptation decisions are ultimately decentralized. The current solutions to improve coordination, based on ?premining? cryptocoins, taxing members and incentivizing developers, are insufficient. For blockchain to fulfill its promise and out-compete centralized firms, it needs to develop new forms of ?soft? decentralized governance (anarchic, aristocratic, democratic, and autocratic) that allow networks to avoid bad equilibria.

New: Blockchain: The Birth of Decentralized Governance
Date Posted:Thu, 10 May 2018 16:01:46 -0500
By allowing networks to split, decentralized blockchain platforms protect members against hold up, but hinder coordination, given that adaptation decisions are ultimately decentralized. The current solutions to improve coordination, based on “premining” cryptocoins, taxing members and incentivizing developers, are insufficient. For blockchain to fulfill its promise and out-compete centralized firms, it needs to develop new forms of “soft” decentralized governance (anarchic, aristocratic, democratic, and autocratic) that allow networks to avoid bad equilibria.

REVISION: The Sovereign-Bank Diabolic Loop and Esbies
Date Posted:Tue, 14 Jun 2016 11:07:48 -0500
We propose a simple model of the sovereign-bank diabolic loop, and establish four results. First, the diabolic loop can be avoided by restricting banks’ domestic sovereign exposures relative to their equity. Second, equity requirements can be lowered if banks only hold senior domestic sovereign debt. Third, such requirements shrink even further if banks only hold the senior tranche of an internationally diversified sovereign portfolio – known as ESBies in the euro-area context. Finally, ESBies generate more safe assets than domestic debt tranching alone; and, insofar as the diabolic loop is defused, the junior tranche generated by the securitization is itself risk-free.

The Sovereign-Bank Diabolic Loop and ESBies
Date Posted:Mon, 13 Jun 2016 14:32:59 -0500
We propose a simple model of the sovereign-bank diabolic loop, and establish four results. First, the diabolic loop can be avoided by restricting banks' domestic sovereign exposures relative to their equity. Second, equity requirements can be lowered if banks only hold senior domestic sovereign debt. Third, such requirements shrink even further if banks only hold the senior tranche of an internationally diversified sovereign portfolio - known as ESBies in the euro-area context. Finally, ESBies generate more safe assets than domestic debt tranching alone; and, insofar as the diabolic loop is defused, the junior tranche generated by the securitization is itself risk-free.

Relational Knowledge Transfers
Date Posted:Mon, 18 Apr 2016 15:29:34 -0500
An expert with general knowledge trains a cash-constrained novice. Faster training increases the novice?s productivity and his ability to compensate the expert; it also shrinks the stock of knowledge yet to be transferred, reducing the expert?s ability to retain the novice. The profit-maximizing agreement is a multi-period apprenticeship in which knowledge is transferred gradually over time. The expert adopts a " 1/e rule" whereby, at the beginning of the relationship, the novice is trained just enough to produce a fraction 1/e of the efficient output. This rule causes inefficiently lengthy relationships that grow longer the more patient the players. We discuss policy interventions.

The Sovereign-Bank Diabolic Loop and Esbies
Date Posted:Mon, 15 Feb 2016 12:06:04 -0600
We propose a simple model of the sovereign-bank diabolic loop, and establish four results. First, the diabolic loop can be avoided by restricting banks domestic sovereign exposures relative to their equity. Second, equity requirements can be lowered if banks only hold senior domestic sovereign debt. Third, such requirements shrink even further if banks only hold the senior tranche of an internationally diversified sovereign portfolio known as ESBies in the euro-area context. Finally, ESBies generate more safe assets than domestic debt tranching alone; and, insofar as the diabolic loop is defused, the junior tranche generated by the securitization is itself risk-free.

REVISION: The Sovereign-Bank Diabolic Loop and Esbies
Date Posted:Wed, 10 Feb 2016 20:47:07 -0600
We propose a simple model of the sovereign-bank diabolic loop, and establish four results. First, the diabolic loop can be avoided by restricting banks’ domestic sovereign exposures relative to their equity. Second, equity requirements can be lowered if banks only hold senior domestic sovereign debt. Third, such requirements shrink even further if banks only hold the senior tranche of an internationally diversified sovereign portfolio – known as ESBies in the euro-area context. Finally, ESBies generate more safe assets than domestic debt tranching alone; and, insofar as the diabolic loop is defused, the junior tranche generated by the securitization is itself risk-free.

The Sovereign-Bank Diabolic Loop and Esbies
Date Posted:Mon, 25 Jan 2016 15:34:01 -0600
We propose a simple model of the sovereign-bank diabolic loop, and establish four results. First, the diabolic loop can be avoided by restricting banks? domestic sovereign exposures relative to their equity. Second, equity requirements can be lowered if banks only hold senior domestic sovereign debt. Third, such requirements shrink even further if banks only hold the senior tranche of an internationally diversified sovereign portfolio ? known as ESBies in the euro-area context. Finally, ESBies generate more safe assets than domestic debt tranching alone; and, insofar as the diabolic loop is defused, the junior tranche generated by the securitization is itself risk-free.

REVISION: The Sovereign-Bank Diabolic Loop and Esbies
Date Posted:Mon, 25 Jan 2016 05:34:01 -0600
We propose a simple model of the sovereign-bank diabolic loop, and establish four results. First, the diabolic loop can be avoided by restricting banks’ domestic sovereign exposures relative to their equity. Second, equity requirements can be lowered if banks only hold senior domestic sovereign debt. Third, such requirements shrink even further if banks only hold the senior tranche of an internationally diversified sovereign portfolio – known as ESBies in the euro-area context. Finally, ESBies generate more safe assets than domestic debt tranching alone; and, insofar as the diabolic loop is defused, the junior tranche generated by the securitization is itself risk-free.

Knowledge-Based Hierarchies: Using Organizations to Understand the Economy
Date Posted:Fri, 07 Aug 2015 15:14:00 -0500
Incorporating the decision of how to organize the acquisition, use, and communication of knowledge into economic models is essential to understand a wide variety of economic phenomena. We survey the literature that has used knowledge-based hierarchies to study issues such as the evolution of wage inequality, the growth and productivity of firms, economic development, and the gains from international trade, as well as offshoring and the formation of international production teams. We also review the nascent empirical literature that has, so far, confirmed the importance of organizational decisions and many of their more salient implications.

Why Organizations Fail: Models and Cases
Date Posted:Tue, 10 Feb 2015 10:50:35 -0600
Organizations fail due to incentive problems (agents do not want to act in the organization's interests) and bounded rationality problems (agents do not have the necessary information to do so). This survey uses recent advances in organizational economics to illuminate organizational failures along these two dimensions. We combine reviews of the literature with simple models and case discussions. Specifically, we consider failures related to the allocation of authority and short-termism, both of which are instances of 'multitasking problems'; communication failures in the presence of both soft and hard information due to incentive misalignments; resistance to change due to vested interests and rigid cultures; and failures related to the allocation of talent and miscommunication due to bounded rationality. We find that the organizational economics literature provides parsimonious explanations for a large range of economically significant failures.

Knowledge-Based Hierarchies: Using Organizations to Understand the Economy
Date Posted:Wed, 22 Oct 2014 12:15:56 -0500
We argue that incorporating the decision of how to organize the acquisition, use, and communication of knowledge into economic models is essential to understand a wide variety of economic phenomena. We survey the literature that has used knowledge-based hierarchies to study issues like the evolution of wage inequality, the growth and productivity of firms, economic development, the gains from international trade, as well as offshoring and the formation of international production teams, among many others. We also review the nascent empirical literature that has, so far, confirmed the importance of organizational decisions and many of its more salient implications.

The Distinct Effects of Information Technology and Communication Technology on Firm Organization
Date Posted:Mon, 25 Nov 2013 14:31:45 -0600
Guided by theories of management by exception, we study the impact of Information and Communication Technology on worker and plant manager autonomy and span of control. The theory suggests that information technology is a decentralizing force, whereas communication technology is a centralizing force. Using a new dataset of American and European manufacturing firms, we find indeed that better information technologies (Enterprise Resource Planning for plant managers and CAD/CAM for production workers) are associated with more autonomy and a wider span, while technologies that improve communication (like data intranets) decrease autonomy for workers and plant managers. Using instrumental variables (distance from ERP's birthplace and heterogeneous telecommunication costs arising from regulation) strengthens our results.

Firm Size Distortions and the Productivity Distribution: Evidence from France
Date Posted:Thu, 06 Jun 2013 10:25:31 -0500
We show how size-contingent laws can be used to identify the equilibrium and welfare effects of labor regulation. Our framework incorporates such regulations into the Lucas (1978) model and applies this to France where many labor laws start to bind on firms with exactly 50 or more employees. Using data on the population of firms between 2002 and 2007 period, we structurally estimate the key parameters of our model to construct counterfactual size, productivity and welfare distributions. With flexible wages, the deadweight loss of the regulation is below 1% of GDP, but when wages are downwardly rigid welfare losses exceed 5%. We also show, regardless of wage flexibility, that the main losers from the regulation are workers (and to a lesser extent large firms) and the main winners are small firms.

Relational Knowledge Transfers
Date Posted:Wed, 08 May 2013 10:05:48 -0500
An expert must train a novice. The novice initially has no cash, so he can only pay the expert with the accumulated surplus from his production. At any time, the novice can leave the relationship with his acquired knowledge and produce on his own. The sole reason he does not is the prospect of learning in future periods. The profit-maximizing relationship is structured as an apprenticeship, in which all production generated during training is used to compensate the expert. Knowledge transfer takes a simple form. In the first period, the expert gifts the novice a positive level of knowledge, which is independent of the players' discount rate. After that, the novice's total value of knowledge grows at the players' discount rate until all knowledge has been transferred. The inefficiencies that arise from this contract are caused by the expert's artificially slowing down the rate of knowledge transfer rather than by her reducing the total amount of knowledge eventually transferred. We show that these inefficiencies are larger the more patient the players are. Finally, we study the impact of knowledge externalities across players.

Political Credit Cycles: The Case of the Euro Zone
Date Posted:Wed, 03 Apr 2013 10:01:33 -0500
We study the mechanisms through which the adoption of the Euro delayed, rather than advanced, economic reforms in the Euro zone periphery and led to the deterioration of important institutions in these countries. We show that the abandonment of the reform process and the institutional deterioration, in turn, not only reduced their growth prospects but also fed back into financial conditions, prolonging the credit boom and delaying the response to the bubble when the speculative nature of the cycle was already evident. We analyze empirically the interrelation between the financial boom and the reform process in Greece, Spain, Ireland, and Portugal and, by way of contrast, in Germany, a country that did experience a reform process after the creation of the Euro.

Political Credit Cycles: The Case of the Euro Zone
Date Posted:Fri, 22 Mar 2013 08:01:31 -0500
We study the mechanisms through which the adoption of the Euro delayed, rather than advanced, economic reforms in the Euro zone periphery and led to the deterioration of important institutions in these countries. We show that the abandonment of the reform process and the institutional deterioration, in turn, not only reduced their growth prospects but also fed back into financial conditions, prolonging the credit boom and delaying the response to the bubble when the speculative nature of the cycle was already evident. We analyze empirically the interrelation between the financial boom and the reform process in Greece, Spain, Ireland, and Portugal and, by way of contrast, in Germany, a country that did experience a reform process after the creation of the Euro.

Firm Size Distortions and the Productivity Distribution: Evidence from France
Date Posted:Sat, 09 Mar 2013 12:21:37 -0600
We show how size-contingent laws can be used to identify the equilibrium and welfare effects of labor regulation. Our framework incorporates such regulations into the Lucas (1978) model and applies this to France where many labor laws start to bind on firms with exactly 50 or more employees. Using data on the population of firms between 2002 and 2007 period, we structurally estimate the key parameters of our model to construct counterfactual size, productivity and welfare distributions. With flexible wages, the deadweight loss of the regulation is below 1% of GDP, but when wages are downwardly rigid welfare losses exceed 5%. We also show, regardless of wage flexibility, that the main losers from the regulation are workers (and to a lesser extent large firms) and the main winners are small firms.

Firm Size Distortions and the Productivity Distribution: Evidence from France
Date Posted:Fri, 01 Mar 2013 09:16:58 -0600
We show how size-contingent laws can be used to identify the equilibrium and welfare effects of labor regulation. Our framework incorporates such regulations into the Lucas (1978) model and applies this to France where many labor laws start to bind on firms with exactly 50 or more employees. Using data on the population of firms between 2002 and 2007 period, we structurally estimate the key parameters of our model to construct counterfactual size, productivity and welfare distributions. With flexible wages, the deadweight loss of the regulation is below 1% of GDP, but when wages are downwardly rigid welfare losses exceed 5%. We also show, regardless of wage flexibility, that the main losers from the regulation are workers (and to a lesser extent large firms) and the main winners are small firms.

Professional Service Outsourcing, Asymmetric Information and Wage Inequality
Date Posted:Fri, 28 Sep 2012 17:12:24 -0500
The economy is experiencing a large shift towards professional services. Markets for these services are characterized by large information asymmetries: the difficulty in providing the necessary advice, the quality of the advice, and whether a problem is solved may all be unobservable. Our analysis considers these markets in a general equilibrium setting, which allows us to address the selection of talent into occupations and their efficiency and distributional implications. We first show that reductions in communications costs allow these markets to appear and increase wage inequality, as they favor the most skilled agents. However, under asymmetric information these markets are unable to exclude the least talented from posing as experts. If contingent contracts cannot be written, the market collapses and no services are bought or sold. If output contingent contracts are feasible, market exchanges weakly involve excessive trade. Despite the asymmetric information efficiency can be attainable when experts can solve many problems. Even when the allocation is efficient, the asymmetry of information has distributional consequences. It benefits moderately skilled agents at the expense of the least talented and most talented ones.

New: Organizing for Synergies
Date Posted:Sat, 22 Oct 2011 07:15:45 -0500
Large companies are usually organized into business units, yet some activities are almost always centralized in a company-wide functional unit. We first show that organizations endogenously create an incentive conflict between functional managers (who desire excessive standardization) and business-unit managers (who desire excessive local adaptation). We then study how the allocation of authority and tasks to functional and business-unit managers interacts with this endogenous incentive ...

Organizing for Synergies
Date Posted:Sat, 22 Oct 2011 00:00:00 -0500
Large companies are usually organized into business units, yet some activities are almost always centralized in a company-wide functional unit. We first show that organizations endogenously create an incentive conflict between functional managers (who desire excessive standardization) and business-unit managers (who desire excessive local adaptation). We then study how the allocation of authority and tasks to functional and business-unit managers interacts with this endogenous incentive conflict. Our analysis generates testable implications for the likely success of mergers and for the organizational structure and incentives inside multidivisional firms.

REVISION: Completing Contracts Ex Post: How Car Manufacturers Manage Car Dealers
Date Posted:Mon, 01 Aug 2011 08:37:42 -0500
This article illustrates how contracts are completed ex post in practice and, in so doing, indirectly suggests what the real function of contracts may be. Our evidence comes from the contracts between automobile manufacturers and their dealers in 23 dealership networks in Spain. Franchising dominates automobile distribution because of the need to decentralize pricing and control of service decisions. It motivates local managers to undertake these activities at minimum cost for the manufacturer.

Organizational Economics with Cognitive Costs
Date Posted:Thu, 19 May 2011 11:16:58 -0500
Organizational economics has advanced along two parallel tracks, one concerned with motivating agents with diverging objectives, the other - less developed - with coordinating agents under cognitive limits. This survey focuses on the second strand and attempts to bring the two strands together. Organizations are viewed as responses to the cognitive costs faced by their (potential) members. We review existing approaches such as team theory, hierarchies of processors, organizational languages and knowledge hierarchies and we argue that they can help us address an array of important organizational issues. We also review recent developments in the application of these ideas: exploiting complexity measures, combining team theory and contract theory, applying organization theories in labor economics, and using these theories to interpret the wealth of activity data that is becoming available.

New: Specialization, Firms, and Markets: The Division of Labor within and between Law Firms
Date Posted:Fri, 25 Sep 2009 03:06:12 -0500
This article uses confidential microdata from the Census of Services to examine law firms' field boundaries. We find that the share of lawyers working in field-specialized firms increases as market size increases and lawyers field specialize, indicating that transaction costs among lawyers, and not just complementarities in clients' demands, affect law firms' field boundaries. Moreover, we find that this pattern is mainly true when looking at fields where lawyers are involved in dispute ...

Specialization, Firms, and Markets: The Division of Labor within and between Law Firms
Date Posted:Tue, 22 Sep 2009 00:00:00 -0500
This article uses confidential microdata from the Census of Services to examine law firms' field boundaries. We find that the share of lawyers working in field-specialized firms increases as market size increases and lawyers field specialize, indicating that transaction costs among lawyers, and not just complementarities in clients' demands, affect law firms' field boundaries. Moreover, we find that this pattern is mainly true when looking at fields where lawyers are involved in dispute resolution rather than in structuring transactions. We then analyze which combinations of specialists tend to work in the same firm and which tend not to do so. We relate our results to theories of law firms' boundaries from the organizational economics literature. Our evidence leads us to eliminate risk sharing as an important determinant of firms' field boundaries and narrows the set of possible monitoring or knowledge sharing explanations. (JEL D23, J44, L14, ...

New: Earnings Inequality and Coordination Costs: Evidence from U.S. Law Firms
Date Posted:Sun, 20 Sep 2009 10:26:01 -0500
Earnings inequality has increased substantially since the 1970s. Using evidence from confidential Census data on U.S. law offices on lawyers’ organization and earnings, we study the extent to which the mechanism suggested by Lucas (1978) and Rosen (1982), a scale of operations effect linking spans of control and earnings inequality, is responsible for increases in inequality. We first show that earnings inequality among lawyers increased substantially between 1977 and 1992, and that the ...

Earnings Inequality and Coordination Costs: Evidence from U.S. Law Firms
Date Posted:Sun, 20 Sep 2009 00:00:00 -0500
Earnings inequality has increased substantially since the 1970s. Using evidence from confidential Census data on U.S. law offices on lawyers? organization and earnings, we study the extent to which the mechanism suggested by Lucas (1978) and Rosen (1982), a scale of operations effect linking spans of control and earnings inequality, is responsible for increases in inequality. We first show that earnings inequality among lawyers increased substantially between 1977 and 1992, and that the distribution of partner-associate ratios across offices changed in ways consistent with the hypothesis that coordination costs fell during this period. We then propose a 'hierarchical production function' in which output is the product of skill and time and estimate its parameters, applying insights from the equilibrium assignment literature. We find that coordination costs fell broadly and steadily during this period, so that hiring one?s first associate leveraged a partner?s skill by about 30% more in 1992 than 1977. We find also that changes in lawyers? hierarchical organization account for about 2/3 of the increase in earnings inequality among lawyers in the upper tail, but a much smaller share of the increase in inequality between lawyers in the upper tail and other lawyers. These findings indicate that new organizational efficiencies potentially explain increases in inequality, especially among individuals toward the top of the earnings distribution.

New: Organizing Offshoring: Middle Managers and Communication Costs
Date Posted:Tue, 14 Jul 2009 02:34:26 -0500
Why do firms decide to offshore certain parts of their production process? What qualifies certain countries as particularly attractive locations to offshore? In this paper we address these questions with a theory of international production hierarchies in which organizations arise endogenously to make efficient use of agents' knowledge. Our theory highlights the role of host-country management skills (middle management) in bringing about the emergence of international offshoring. By shielding ...

New: The Distinct Effects of Information Technology and Communication Technology on Firm Organization
Date Posted:Mon, 08 Jun 2009 23:34:04 -0500
Empirical studies on information communication technologies (ICT) typically aggregate the information and communication components together. We show theoretically and empirically that these have very different effects on the empowerment of employees, and by extension on wage inequality. If managerial hierarchies are devices to acquire and transmit knowledge and information, technologies that reduce information costs enable agents to acquire more knowledge and 'empower' lower level agents ...

The Distinct Effects of Information Technology and Communication Technology on Firm Organization
Date Posted:Tue, 26 May 2009 00:00:00 -0500
Empirical studies on information communication technologies (ICT) typically aggregate the "information" and "communication" components together. We show theoretically and empirically that these have very different effects on the empowerment of employees, and by extension on wage inequality. If managerial hierarchies are devices to acquire and transmit knowledge and information, technologies that reduce information costs enable agents to acquire more knowledge and 'empower' lower level agents. Conversely, technologies reducing communication costs substitute agent's knowledge for directions from their managers, and lead to centralization. Using an original dataset of firms in the US and seven European countries we study the impact of ICT on worker autonomy, plant manager autonomy and spans of control. Consistently with the theory we find that better information technologies (Enterprise Resource Planning for plant managers and CAD/CAM for production workers) are associated with more autonomy and a wider span of control. By contrast, communication technologies (like data networks) decrease autonomy for both workers and plant managers. Our findings are robust to using exogenous variation in cross-country telecommunication costs arising from differential regulatory regimes.

New: Earnings Inequality and Coordination Costs: Evidence from U.S. Law Firms
Date Posted:Tue, 24 Feb 2009 23:11:14 -0600
Earnings inequality has increased substantially since the 1970s. Using evidence from confidential Census data on U.S. law offices on lawyers' organization and earnings, we study the extent to which the mechanism suggested by Lucas (1978) and Rosen (1982), a scale of operations effect linking spans of control and earnings inequality, is responsible increases in inequality. We first show that earnings inequality among lawyers increased substantially between 1977 and 1992, and that the ...

Earnings Inequality and Coordination Costs: Evidence from U.S. Law Firms
Date Posted:Sat, 21 Feb 2009 19:30:46 -0600
Earnings inequality has increased substantially since the 1970s. Using evidence from confidential Census data on U.S. law offices on lawyers' organization and earnings, we study the extent to which the mechanism suggested by Lucas (1978) and Rosen (1982), a scale of operations effect linking spans of control and earnings inequality, is responsible increases in inequality. We first show that earnings inequality among lawyers increased substantially between 1977 and 1992, and that the distribution of partner-associate ratios across offices changed in ways consistent with the hypothesis that coordination costs fell during this period. We then propose a "hierarchical production function" in which output is the product of skill and time and estimate its parameters, applying insights from the equilibrium assignment literature. We find that coordination costs fell broadly and steadily during this period, so that hiring one's first associate leveraged a partner's skill by about 30% more in 1992 than 1977. We find also that changes in lawyers' hierarchical organization account for about 2/3 of the increase in earnings inequality among lawyers in the upper tail, but a much smaller share of the increase in inequality between lawyers in the upper tail and other lawyers. These findings indicate that new organizational efficiencies potentially explain increases in inequality, especially among individuals toward the top of the earnings distribution.

REVISION: Contractual Allocation of Decision Rights and Incentives: The Case of Automobile Distribution
Date Posted:Sun, 15 Jun 2008 19:52:04 -0500
We analyze empirically the allocation of rights and monetary incentives in automobile franchise contracts. All of these contracts substantially restrict the decision rights of dealers and grant manufacturers extensive rights to specify and enforce dealers' duties. The allocation of decision rights and incentive intensity differs across brands, however. This variation is explained by the incidence of moral hazard. In particular, when the cost of dealer moral hazard is higher and the risk of ...

The Effects of Business-to-Business E-Commerce on Transaction Costs
Date Posted:Tue, 22 Apr 2008 03:49:27 -0500
This paper studies transaction costs changes arising from the introduction of the Internet in transactions between firms. We divide transaction costs into coordination costs and motivation costs. We classify coordination efficiencies into three categories: process improvements, marketplace benefits, and indirect improvements. For motivation costs, we focus on informational asymmetries. We apply this framework to internal data from an Internet-based firm to measure process improvements, ...

Sabotage in Tournaments: Making the Beautiful Game a Bit Less Beautiful
Date Posted:Sun, 17 Feb 2008 16:56:08 -0600
We exploit an incentive change in professional soccer leagues aimed at encouraging more attacking and goal scoring to obtain evidence on the effect of stronger incentives on productive and destructive effort. Using as control the behavior of the same teams in a competition that experienced no changes in incentives, we provide differences-in-differences estimates of the effect of the incentive change on the behavior of teams. We find that, although teams increased offensive effort, they also ...

New: Organizing Growth
Date Posted:Fri, 15 Feb 2008 00:18:40 -0600
We study the impact of information and communication technology on growth through its impact on organization and innovation. Agents accumulate knowledge through two activities: innovation (discovering new technologies) and exploitation (learning how to use the current technology). Exploitation requires the development of organizations to coordinate the work of experts, which takes time. The costs and benefits of such organizations depend on the cost of communicating and acquiring information ...

Organizing Growth
Date Posted:Mon, 31 Dec 2007 09:37:28 -0600
We study the impact of information and communication technology on growth through its impact on organization and innovation. Agents accumulate knowledge through two activities: innovation (discovering new technologies) and exploitation (learning how to use the current technology). Exploitation requires the development of organizations to coordinate the work of experts, which takes time. The costs and benefits of such organizations depend on the cost of communicating and acquiring information. We find that while advances in information technology that lower information acquisition costs always increase growth, improvements in communication technology may lead to lower growth and even to stagnation, as the payoff to exploiting innovations through organizations increases relative to the payoff of new radical innovations.

New: The Return to Knowledge Hierarchies
Date Posted:Wed, 19 Sep 2007 08:48:04 -0500
Hierarchies allow individuals to leverage their knowledge through others. time. This mechanism increases productivity and amplifies the impact of skill heterogeneity on earnings inequality. To quantify this effect, we analyze the earnings and organization of U.S. lawyers and use the equilibrium model of knowledge hierarchies in Garicano and Rossi-Hansberg (2006) to assess how much lawyers, productivity and the distribution of earnings across lawyers reflects lawyers' ability to organize ...

The Return to Knowledge Hierarchies
Date Posted:Wed, 19 Sep 2007 00:00:00 -0500
Hierarchies allow individuals to leverage their knowledge through others. time. This mechanism increases productivity and amplifies the impact of skill heterogeneity on earnings inequality. To quantify this effect, we analyze the earnings and organization of U.S. lawyers and use the equilibrium model of knowledge hierarchies in Garicano and Rossi-Hansberg (2006) to assess how much lawyers, productivity and the distribution of earnings across lawyers reflects lawyers' ability to organize problem-solving hierarchically. We analyze earnings, organizational, and assignment patterns and show that they are generally consistent with the main predictions of the model. We then use these data to estimate the model. Our estimates imply that hierarchical production leads to at least a 30% increase in production in this industry, relative to a situation where lawyers within the same office do not vertically specialize. We further find that it amplifies earnings inequality, increasing the ratio between the 95th and 50th percentiles from 3.7 to 4.8. We conclude that the impact of hierarchy on productivity and earnings distributions in this industry is substantial but not dramatic, reflecting the fact that the problems lawyers face are diverse and that the solutions tend to be customized.

New: The Return to Knowledge Hierarchies
Date Posted:Fri, 29 Jun 2007 09:26:28 -0500
Hierarchies allow individuals to leverage their knowledge through others' time. This mechanism increases productivity and amplifies the impact of skill heterogeneity on earnings inequality. To quantify this effect, we analyze the earnings and organization of U.S. lawyers and use the equilibrium model of knowledge hierarchies in Garicano and Rossi-Hansberg (2006) to assess how much lawyers' productivity and the distribution of earnings across lawyers reflects lawyers' ability to organize ...

The Return to Knowledge Hierarchies
Date Posted:Fri, 29 Jun 2007 00:00:00 -0500
Hierarchies allow individuals to leverage their knowledge through others' time. This mechanism increases productivity and amplifies the impact of skill heterogeneity on earnings inequality. To quantify this effect, we analyze the earnings and organization of U.S. lawyers and use the equilibrium model of knowledge hierarchies in Garicano and Rossi-Hansberg (2006) to assess how much lawyers' productivity and the distribution of earnings across lawyers reflects lawyers' ability to organize problem-solving hierarchically. We analyze earnings, organizational, and assignment patterns and show that they are generally consistent with the main predictions of the model. We then use these data to estimate the model. Our estimates imply that hierarchical production leads to at least a 30% increase in production in this industry, relative to a situation where lawyers within the same office do not.

New: The Return to Knowledge Hierarchies
Date Posted:Tue, 29 May 2007 00:36:03 -0500
Hierarchies allow individuals to leverage their knowledge through others' time. This mechanism increases productivity and amplifies the impact of skill heterogeneity on earnings inequality. To quantify this effect, we analyze the earnings and organization of U.S. lawyers and use the equilibrium model of knowledge hierarchies in Garicano and Rossi-Hansberg (2006) to assess how much lawyers' productivity and the distribution of earnings across lawyers reflects lawyers' ability to organize ...

Organizing for Synergies
Date Posted:Tue, 08 May 2007 00:00:00 -0500
Multi-product firms create value by integrating functional activities such as manufacturing across business units. This integration often requires making functional managers responsible for implementing standardization, thereby limiting business-unit managers' authority. Realizing synergies then involves a tradeoff between motivation and coordination. Motivating managers requires narrowly-focused incentives around their area of responsibility. Functional managers become biased toward excessive standardization and business-unit managers may misrepresent local market information to limit standardization. As a result, integration may be value-destroying when motivation is sufficiently important. Providing functional managers only with "dotted-line control" (where business-unit managers can block standardization) has limited ability to improve the tradeoff.

New: Organizing for Synergies
Date Posted:Mon, 07 May 2007 19:29:29 -0500
Multi-product firms create value by integrating functional activities such as manufacturing across business units. This integration often requires making functional managers responsible for implementing standardization, thereby limiting business-unit managers' authority. Realizing synergies then involves a tradeoff between motivation and coordination. Motivating managers requires narrowly-focused incentives around their area of responsibility. Functional managers become biased toward excessive ...

The Return to Knowledge Hierarchies
Date Posted:Fri, 12 Jan 2007 11:42:06 -0600
Hierarchies allow individuals to leverage their knowledge through others' time. This mechanism increases productivity and amplifies the impact of skill heterogeneity on earnings inequality. To quantify this effect, we analyze the earnings and organization of U.S. lawyers and use the equilibrium model of knowledge hierarchies in Garicano and Rossi-Hansberg (2006) to assess how much lawyers' productivity and the distribution of earnings across lawyers reflects lawyers' ability to organize problem-solving hierarchically. We analyze earnings, organizational, and assignment patterns and show that they are generally consistent with the main predictions of the model. We then use these data to estimate the model. Our estimates imply that hierarchical production leads to at least a 30% increase in production in this industry, relative to a situation where lawyers within the same office do not "vertically specialize." We further find that it amplifies earnings inequality, increasing the ratio between the 95th and 50th percentiles from 3.7 to 4.8. We conclude that the impact of hierarchy on productivity and earnings distributions in this industry is substantial but not dramatic, reflecting the fact that the problems lawyers face are diverse and that the solutions tend to be customized.

New: Computing Crime: Information Technology, Police Effectiveness and the Organization of Policing
Date Posted:Tue, 14 Nov 2006 10:28:01 -0600
How does information technology (IT) affect the organization of police work? How does it in turn affect police crime-fighting effectiveness? To answer these questions, we construct a new panel data set of police departments covering 1987-2003. We find that while IT adoption had substantial effects on a wide range of police organizational practices, it had, by itself, a negligible impact on crime-fighting effectiveness. These results are robust to various methods for controlling for ...

Computing Crime: Information Technology, Police Effectiveness and the Organization of Policing
Date Posted:Tue, 14 Nov 2006 00:00:00 -0600
How does information technology (IT) affect the organization of police work? How does it in turn affect police crime-fighting effectiveness? To answer these questions, we construct a new panel data set of police departments covering 1987-2003. We find that while IT adoption had substantial effects on a wide range of police organizational practices, it had, by itself, a negligible impact on crime-fighting effectiveness. These results are robust to various methods for controlling for agency-level characteristics and the endogeneity of IT use. We then suggest and test two explanations for this puzzle. First, we demonstrate that use of a particular technology, computerized record-keeping, increased recorded crime rates. Second, we provide evidence that IT investments only had a substantial impact on crime clearance rates and crime rates when undertaken as part of a broad set of complementary organizational practices such as those in the Compstat program.

Organizing Offshoring: Middle Managers and Communication Costs
Date Posted:Thu, 25 May 2006 00:00:00 -0500
Why do firms decide to offshore certain parts of their production process? What qualifies certain countries as particularly attractive locations to offshore? In this paper we address these questions with a theory of international production hierarchies in which organizations arise endogenously to make efficient use of agents' knowledge. Our theory highlights the role of host-country management skills (middle management) in bringing about the emergence of international offshoring. By shielding top management in the source country from routine problems faced by host country workers, the presence of middle managers improves the efficiency of the transmission of knowledge across countries. The model further delivers the prediction that the positive effect of middle skills on offshoring is weaker, the more advanced are communication technologies in the host country. We provide evidence consistent with this prediction.

Contractual Allocation of Decision Rights and Incentives: The Case of Automobile Distribution
Date Posted:Mon, 02 Jan 2006 10:57:37 -0600
We analyze empirically the allocation of rights and monetary incentives in automobile franchise contracts. All of these contracts substantially restrict the decision rights of dealers and grant manufacturers extensive rights to specify and enforce dealers' duties. The allocation of decision rights and incentive intensity differs across brands, however. This variation is explained by the incidence of moral hazard. In particular, when the cost of dealer moral hazard is higher and the risk of ...

REVISION: Completing Contracts Ex Post: How Car Manufacturers Manage Car Dealers
Date Posted:Wed, 07 Dec 2005 05:52:45 -0600
This article illustrates how contracts are completed ex post in practice and, in so doing, indirectly suggests what the real function of contracts may be. Our evidence comes from the contracts between automobile manufacturers and their dealers in 23 dealership networks in Spain. Franchising dominates automobile distribution because of the need to decentralize pricing and control of service decisions. It motivates local managers to undertake these activities at minimum cost for the manufacturer.

Completing Contracts Ex Post: How Car Manufacturers Manage Car Dealers
Date Posted:Wed, 07 Dec 2005 00:00:00 -0600
This article illustrates how contracts are completed ex post in practice and, in so doing, indirectly suggests what the real function of contracts may be. Our evidence comes from the contracts between automobile manufacturers and their dealers in 23 dealership networks in Spain. Franchising dominates automobile distribution because of the need to decentralize pricing and control of service decisions. It motivates local managers to undertake these activities at minimum cost for the manufacturer. However, it creates incentive conflicts, both between manufacturers and dealers and among dealers themselves, concerning the level of sales and service provided. It also holds potential for expropriation of specific investments. Contracts deal with these conflicts by restricting dealers' decision rights and granting manufacturers extensive completion, monitoring and enforcement powers. The main mechanism that may prevent abuse of these powers is the manufacturers' reputational capital.

Sabotage in Tournaments: Making the Beautiful Game a Bit Less Beautiful
Date Posted:Mon, 24 Oct 2005 00:00:00 -0500
We exploit an incentive change in professional soccer leagues aimed at encouraging more attacking and goal scoring to obtain evidence on the effect of stronger incentives on productive and destructive effort. Using as control the behavior of the same teams in a competition that experienced no changes in incentives, we provide differences-in-differences estimates of the effect of the incentive change on the behavior of teams. We find that, although teams increased offensive effort, they also increased destructive effort ('sabotage') substantially, resulting in no net change in scoring. When ahead, teams became more conservative, increasing their defenders, scoring less goals, and allowing fewer attempts to score by their opponents. We also find that teams that engage more in sabotage activities depress the attendance at their rival's home stadiums, and that indeed attendance suffered as a result of the incentive change. Thus, teams responded to stronger incentives, but in an undesirable way.

Intelligence Failures: An Organizational Economics Perspective
Date Posted:Thu, 01 Sep 2005 08:44:43 -0500
Two recent failures of the United States intelligence system have led to the creation of high-level investigative commissions. The failure to prevent the terrorist attacks of 9/11 prompted the creation of the 9/11 Commission, and the mistaken belief that Saddam Hussein had retained weapons of mass destruction prompted the creation of the Weapons of Mass Destruction Commission. We use insights from organizational economics to analyze the principal organizational issues raised by these ...

Intelligence Failures: An Organizational Economics Perspective
Date Posted:Thu, 01 Sep 2005 00:00:00 -0500
Two recent failures of the United States intelligence system have led to the creation of high-level investigative commissions. The failure to prevent the terrorist attacks of 9/11 prompted the creation of the 9/11 Commission, and the mistaken belief that Saddam Hussein had retained weapons of mass destruction prompted the creation of the Weapons of Mass Destruction Commission. We use insights from organizational economics to analyze the principal organizational issues raised by these commissions.

Organization and Inequality in a Knowledge Economy
Date Posted:Tue, 02 Aug 2005 22:19:12 -0500
We present a theory of the organization of work in an economy where knowledge is an essential input in production: a knowledge economy. In this economy a continuum of agents with heterogeneous skills must choose how much knowledge to acquire and may produce on their own or in organizations. Our theory generates an assignment of workers to positions, a wage structure, and a continuum of knowledge-based hierarchies. Organization allows low skill agents to ask others for directions. Thus, they acquire less knowledge than in isolation. In contrast, organization allows high skill agents to leverage their knowledge through large teams. Hence, they acquire more knowledge than on their own. As a result, organization decreases wage inequality within workers, but increases income inequality among the highest skill agents. We also show that equilibrium assignments and earnings can be interpreted as the outcome of alternative market institutions such as firms, or consulting and referral markets. We use our theory to study the impact of information and communication technology, and contrast its predictions with US evidence.

Organization and Inequality in a Knowledge Economy
Date Posted:Tue, 02 Aug 2005 13:19:11 -0500
We present a theory of the organization of work in an economy where knowledge is an essential input in production: a knowledge economy. In this economy a continuum of agents with heterogeneous skills must choose how much knowledge to acquire and may produce on their own or in organizations. Our theory generates an assignment of workers to positions, a wage structure, and a continuum of knowledge-based hierarchies. Organization allows low skill agents to ask others for directions. Thus, they ...

Managerial Leverage is Limited by the Extent of the Market: Hierarchies, Specialization and the Util
Date Posted:Tue, 21 Jun 2005 07:00:35 -0500
This paper examines hierarchies' role in the organization of human-capital-intensive production. We develop an equilibrium model of hierarchical organization, then provide empirical evidence using confidential data on thousands of law offices from the 1992 Census of Services. We show how the equilibrium assignment of individuals to hierarchical positions varies with the degree to which their human capital is field-specialized; then show how this equilibrium changes with the extent of the market.

Managerial Leverage is Limited by the Extent of the Market: Hierarchies, Specialization and the Utilization of Lawyers' Human Capital
Date Posted:Tue, 21 Jun 2005 00:00:00 -0500
This paper examines hierarchies' role in the organization of human-capital-intensive production. We develop an equilibrium model of hierarchical organization, then provide empirical evidence using confidential data on thousands of law offices from the 1992 Census of Services. We show how the equilibrium assignment of individuals to hierarchical positions varies with the degree to which their human capital is field-specialized; then show how this equilibrium changes with the extent of the market. When the extent of the market increases, individuals' knowledge becomes narrower, but deeper. Managerial leverage, the number of workers per manager, optimally increases to exploit this depth. We find empirical evidence consistent with a central proposition of the model: the share of lawyers that work in hierarchies and the ratio of associates to partners increases as market size increases and lawyers field-specialize. Other results provide evidence against alternative interpretations that emphasize unobserved differences in the distribution of demand or 'firm size effects', and lend additional support to the view that a role hierarchies play in legal services is to help exploit increasing returns associated with the utilization of human capital.

Offshoring in a Knowledge Economy
Date Posted:Tue, 29 Mar 2005 17:46:03 -0600
How does the formation of cross-country teams affect the organization of work an the structure of wages? To study this question we propose a theory of the assignmenof heterogeneous agents into hierarchical teams, where less skilled agents specialize in production and more skilled agents specialize in problem solving. We first analyze the properties of the competitive equilibrium of the model in a closed economy, and show that the model has a unique and efficient solution. We then study the ...

Offshoring in a Knowledge Economy
Date Posted:Tue, 29 Mar 2005 00:00:00 -0600
How does the formation of cross-country teams affect the organization of work an the structure of wages? To study this question we propose a theory of the assignmenof heterogeneous agents into hierarchical teams, where less skilled agents specialize in production and more skilled agents specialize in problem solving. We first analyze the properties of the competitive equilibrium of the model in a closed economy, and show that the model has a unique and efficient solution. We then study the equilibrium of a two-country model (North and South), where countries differ in their distributions of ability, and in which agents in different countries can join together in teams. We refer to this type of integration as globalization. Globalization leads to better matches for all southern workers but only for the best northern workers. As a result, we show that globalization increases wage inequality in the South but not necessarily in the North. We also study how globalization affects the size distribution of firms and the patterns of consumption and trade in the global economy.

Offshoring in a Knowledge Economy
Date Posted:Tue, 01 Mar 2005 07:51:51 -0600
How does the formation of cross-country teams affect the organization of work and the structure of wages? To study this question we propose a theory of the assignment of heterogeneous agents into hierarchical teams, where less skilled agents specialize in production and more skilled agents specialize in problem solving. We first analyze the properties of the competitive equilibrium of the model in a closed economy, and show that the model has a unique and efficient solution. We then study the equilibrium of a two-country model (North and South), where countries differ in their distributions of ability, and in which agents in different countries can join together in teams. We refer to this type of integration as globalization. Globalization leads to better matches for all southern workers but only for the best northern workers. As a result, we show that globalization increases wage inequality in the South but not necessarily in the North. We also study how globalization affects the size distribution of firms and the patterns of consumption and trade in the global economy.

...
Date Posted:Mon, 28 Feb 2005 21:51:50 -0600

Hierarchies, Specialization, and the Utilization of Knowledge: Theory and Evidence from the Legal Se...
Date Posted:Wed, 23 Jun 2004 07:01:18 -0500
What role do hierarchies play with respect to the organization of production and what determines their structure? We develop an equilibrium model of hierarchical organization, then provide empirical evidence using confidential data on thousands of law offices from the 1992 Census of Services. The driving force in the model is increasing returns in the utilization of acquired knowledge. We show how the equilibrium assignment of individuals to hierarchical positions varies with the degree to ...

Specialization, Firms, and Markets: The Division of Labor Within and Between Law Firms
Date Posted:Wed, 02 Jun 2004 11:50:51 -0500
What is the role of firms and markets in mediating the division of labor? This paper uses confidential microdata from the Census of Services to examine law firms' boundaries. We find that firms' field scope narrows as market size increases and individuals specialize, indicating that firms' boundaries reflect organizational trade-offs. Moreover, we find that whether the division of labor is mediated by firms differs systematically according to whether lawyers in a particular field are mainly ...

Hierarchies, Specialization, and the Utilization of Knowledge: Theory and Evidence from the Legal Services Industry
Date Posted:Mon, 03 May 2004 21:12:51 -0500
What role do hierarchies play with respect to the organization of production and what determines their structure? We develop an equilibrium model of hierarchical organization, then provide empirical evidence using confidential data on thousands of law offices from the 1992 Census of Services. The driving force in the model is increasing returns in the utilization of acquired knowledge. We show how the equilibrium assignment of individuals to hierarchical positions varies with the degree to which their human capital is field-specialized, then show how this equilibrium changes with the extent of the market. We find empirical evidence consistent with a central proposition of the model: the share of lawyers that work in hierarchies and the ratio of associates to partners increases as market size increases and lawyers field-specialize. Other results provide evidence against alternative interpretations that emphasize unobserved differences in the distribution of demand or 'firm size effects,' and lend additional support to the view that a role hierarchies play in legal services is to help exploit increasing returns associated with the utilization of human capital.

Hierarchies, Specialization, and the Utilization of Knowledge: Theory and Evidence from the Legal Se...
Date Posted:Mon, 03 May 2004 12:41:30 -0500
What role do hierarchies play with respect to the organization of production and what determines their structure? We develop an equilibrium model of hierarchical organization, then provide empirical evidence using confidential data on thousands of law offices from the 1992 Census of Services. The driving force in the model is increasing returns in the utilization of acquired knowledge. We show how the equilibrium assignment of individuals to hierarchical positions varies with the degree to ...

Hierarchies, Specialization, and the Utilization of Knowledge: Theory and Evidence from the Legal Services Industry
Date Posted:Tue, 20 Apr 2004 15:30:40 -0500
What role do hierarchies play with respect to the organization of production and what determines their structure? We develop an equilibrium model of hierarchical organization, then provide empirical evidence using confidential data on thousands of law offices from the 1992 Census of Services. The driving force in the model is increasing returns in the utilization of acquired knowledge. We show how the equilibrium assignment of individuals to hierarchical positions varies with the degree to which their human capital is field-specialized, then show how this equilibrium changes with the extent of the market. We find empirical evidence consistent with a central proposition of the model: the share of lawyers that work in hierarchies and the ratio of associates to partners increases as market size increases and lawyers field-specialize. Other results provide evidence against alternative interpretations that emphasize unobserved differences in the distribution of demand or firm size effects, and lend additional support to the view that a role hierarchies play in legal services is to help exploit increasing returns associated with the utilization of human capital.

Codes in Organizations
Date Posted:Mon, 09 Feb 2004 11:48:37 -0600
A code is a technical language that members of an organization learn in order to communicate among themselves and with members of other organizations. What are the features of an optimal code and how does it interact with the characteristics of the organization? This Paper develops a simple communication model and characterizes optimal codes. There exists a fundamental trade-off between choosing a specialized code that simplifies internal communication and a common code that facilitates external communication. We identify the drivers of this trade-off and we study the strategic aspects of code adoption. The results are used to interpret some existing organizational structures.

Codes in Organizations
Date Posted:Mon, 09 Feb 2004 01:48:36 -0600
A code is a technical language that members of an organization learn in order to communicate among themselves and with members of other organizations. What are the features of an optimal code and how does it interact with the characteristics of the organization? This Paper develops a simple communication model and characterizes optimal codes. There exists a fundamental trade-off between choosing a specialized code that simplifies internal communication and a common code that facilitates ...

Specialization, Firms, and Markets: The Division of Labor within and between Law Firms
Date Posted:Tue, 10 Jun 2003 20:02:05 -0500
What is the role of firms and markets in mediating the division of labor? This paper uses confidential microdata from the Census of Services to examine law firms' boundaries. We find that firms' field scope narrows as market size increases and individuals specialize, indicating that firms' boundaries reflect organizational trade-offs. Moreover, we find that whether the division of labor is mediated by firms differs systematically according to whether lawyers in a particular field are mainly involved in structuring transactions or in dispute resolution. Our evidence is consistent with hypotheses in which firms' boundaries reflect variation in the value of knowledge-sharing or in the costs of monitoring, but not in risk-sharing. Our findings show how the incentive trade-offs associated with exploiting increasing returns from specialization lead the structure of the industry to be fragmented, but highly-skewed.

Specialization, Firms, and Markets: The Division of Labor within and between Law Firms
Date Posted:Mon, 26 May 2003 14:08:09 -0500
What is the role of firms and markets in mediating the division of labor? This paper uses confidential microdata from the Census of Services to examine law firms' boundaries. We find that firms' field scope narrows as market size increases and individuals specialize, indicating that firms' boundaries reflect organizational trade-offs. Moreover, we find that whether the division of labor is mediated by firms differs systematically according to whether lawyers in a particular field are mainly involved in structuring transactions or in dispute resolution. Our evidence is consistent with hypotheses in which firms' boundaries reflect variation in the value of knowledge-sharing or in the costs of monitoring, but not in risk-sharing. Our findings show how the incentive trade-offs associated with exploiting increasing returns from specialization lead the structure of the industry to be fragmented, but highly-skewed.

Specialization, Firms, and Markets: The Division of Labor Within and Between Law Firms
Date Posted:Mon, 26 May 2003 07:28:03 -0500
What is the role of firms and markets in mediating the division of labor? This paper uses confidential microdata from the Census of Services to examine law firms' boundaries. We find that firms' field scope narrows as market size increases and individuals specialize, indicating that firms' boundaries reflect organizational trade-offs. Moreover, we find that whether the division of labor is mediated by firms differs systematically according to whether lawyers in a particular field are mainly ...

Specialization, Firms and Markets: The Division of Labour Between and Within Law Firms
Date Posted:Mon, 28 Apr 2003 23:29:49 -0500
What is the role of firms and markets in mediating the division of labour? This Paper uses confidential microdata from the Census of Services to examine law firms' boundaries. We first examine how the specialization of lawyers and firms increases as lawyers' returns to specialization increase. In fields where lawyers increasingly specialize with market size, the relationship between the share of lawyers who work in a field-specialized firm and market size indicates whether firms or markets ...

Specialization, Firms and Markets: The Division of Labour between and within Law Firms
Date Posted:Fri, 31 Jan 2003 14:40:58 -0600
What is the role of firms and markets in mediating the division of labour? This Paper uses confidential microdata from the Census of Services to examine law firms' boundaries. We first examine how the specialization of lawyers and firms increases as lawyers' returns to specialization increase. In fields where lawyers increasingly specialize with market size, the relationship between the share of lawyers who work in a field-specialized firm and market size indicates whether firms or markets more efficiently mediate relationships between lawyers in this and other fields. We then examine which pairs of specialists tend to work in the same versus different firms; this provides evidence on the scope of firms that are not field-specialized. We find that whether firms or markets mediate the division of labour varies across fields in a way that corresponds to differences in the value of cross-field referrals, consistent with Garicano and Santos' (2001) proposition that firms facilitate specialization by mediating exchanges of economic opportunities more efficiently than markets.

The Effects of Business-to-Business E-Commerce on Transaction Costs
Date Posted:Fri, 06 Sep 2002 05:20:55 -0500
In this paper, we study the changes in transaction costs from the introduction of the Internet in transactions between firms (i.e., business-to-business (B2B) e-commerce). We begin with a conceptual framework to organize the changes in transaction costs that are likely to result when a transaction is transferred from a physical marketplace to an Internet-based one. Following Milgrom and Roberts (1992), we differentiate between the impact on coordination costs and motivation costs. We argue ...

Favoritism Under Social Pressure
Date Posted:Tue, 25 Sep 2001 08:09:11 -0500
This paper provides empirical evidence of favoritism by agents, where that favoritism is generated by social pressure. To do so, we explore the behavior of professional soccer referees. Referees have discretion over the addition of extra time at the end of a soccer game (called injury time), to compensate for lost time due to unusual stoppages. We test for systematic bias shown by Spanish referees in favor of home teams. We show that referees systematically favor home teams by shortening ...

Referrals
Date Posted:Mon, 24 Sep 2001 06:00:42 -0500
Specialization requires that workers deal with some valuable opportunities themselves and refer other, possibly unverifiable, opportunities to other workers. How do markets and organizations ensure the matching of opportunities with talent in the presence of informational asymmetries about their value? The cost of providing incentives for effort in this context is that they increase the risk of the agent appropriating an opportunity she should refer upstream. Thus spot markets are severely ...

Favoritism Under Social Pressure
Date Posted:Tue, 18 Sep 2001 09:12:04 -0500
This paper provides empirical evidence of favoritism by agents, where that favoritism is generated by social pressure. To do so, we explore the behavior of professional soccer referees. Referees have discretion over the addition of extra time at the end of a soccer game (called injury time), to compensate for lost time due to unusual stoppages. We test for systematic bias shown by Spanish referees in favor of home teams. We show that referees systematically favor home teams by shortening close ...

Contractual Allocation of Decision Rights and Incentives: The Case of Automobile Distribution
Date Posted:Thu, 30 Aug 2001 00:00:00 -0500
We analyze empirically the allocation of rights and monetary incentives in automobile franchise contracts. All of these contracts substantially restrict the decision rights of dealers and grant manufacturers extensive rights to specify and enforce dealers' duties. The allocation of decision rights and incentive intensity differs across brands, however. This variation is explained by the incidence of moral hazard. In particular, when the cost of dealer moral hazard is higher and the risk of manufacturer opportunism is lower, manufacturers hold more rights to determine the performance required from their dealers and to use mechanisms such as monitoring, termination and monetary incentives to ensure that such performance is provided. Key Words: Franchising; Contracts; Self-enforcement; Incentives; Complementarities; ...

Referrals
Date Posted:Sat, 25 Aug 2001 06:38:15 -0500
Specialization requires that workers deal with some valuable opportunities themselves and refer other, possibly unverifiable, opportunities to other workers. How do markets and organizations ensure the matching of opportunities with talent in the presence of informational asymmetries about their value? The cost of providing incentives for effort in this context is that they increase the risk of the agent appropriating an opportunity she should refer upstream. Thus spot markets are severely ...

Referrals
Date Posted:Mon, 23 Jul 2001 00:00:00 -0500
Specialization requires that workers deal with some valuable opportunities themselves and refer other, possibly unverifiable, opportunities to other workers. How do markets and organizations ensure the matching of opportunities with talent in the presence of informational asymmetries about their value? The cost of providing incentives for effort in this context is that they increase the risk of the agent appropriating an opportunity she should refer upstream. Thus spot markets are severely limited in their ability to support referrals, as they involve very powerful effort incentives on those opportunities kept by the referring agents. We show that partnerships, in which agents agree to share opportunities and the income from the opportunities, appear endogenously as a solution to this problem. Partnership contracts support better communication rules at the expense of biasing effort provision away from first best for all activities. The structure of the contract depends both on the frequency of communications and on the interaction between the relative skill of the agents and the direction of the referral flow.

Favoritism Under Social Pressure
Date Posted:Sun, 22 Jul 2001 00:00:00 -0500
This paper provides empirical evidence of favoritism by agents, where that favoritism is generated by social pressure. To do so, we explore the behavior of professional soccer referees. Referees have discretion over the addition of extra time at the end of a soccer game (called injury time), to compensate for lost time due to unusual stoppages. We test for systematic bias shown by Spanish referees in favor of home teams. We show that referees systematically favor home teams by shortening close games where the home team is ahead, and lengthening close games where the home team is behind. They show no such bias for games that are not close. We further show that when the rewards for winning games increase, referees change their bias accordingly. We also identify that the mechanism through which bias operates is the referees' desire to satisfy the crowd, by documenting how the size and composition of the crowd affect referee favoritism.

Referrals
Date Posted:Mon, 09 Jul 2001 16:55:15 -0500
Specialization requires that workers deal with some valuable opportunities themselves and refer other, possibly unverifiable, opportunities to other workers. How do markets and organizations ensure the matching of opportunities with talent in the presence of informational asymmetries about their value? The cost of providing incentives for effort in this context is that they increase the risk of the agent appropriating an opportunity she should refer upstream. Thus spot markets are severely limited in their ability to support referrals, as they involve very powerful effort incentives on those opportunities kept by the referring agents. We show that partnerships, in which agents agree to share opportunities and the income from the opportunities, appear endogenously as a solution to this problem. Partnership contracts support better communication rules at the expense of biasing effort provision away from first best for all activities. The structure of the contract depends both on the frequency of communications and on the interaction between the relative skill of the agents and the direction of the referral flow.

Favoritism Under Social Pressure
Date Posted:Fri, 06 Jul 2001 01:07:45 -0500
This paper provides empirical evidence of favoritism by agents, where that favoritism is generated by social pressure. To do so, we explore the behavior of professional soccer referees. Referees have discretion over the addition of extra time at the end of a soccer game (called injury time), to compensate for lost time due to unusual stoppages. We test for systematic bias shown by Spanish referees in favor of home teams. We show that referees systematically favor home teams by shortening close games where the home team is ahead, and lengthening close games where the home team is behind. They show no such bias for games that are not close. We further show that when the rewards for winning games increase, referees change their bias accordingly. We also identify that the mechanism through which bias operates is the referees' desire to satisfy the crowd, by documenting how the size and composition of the crowd affect referee favoritism.

The Effects of Business-to-Business E-Commerce on Transaction Costs
Date Posted:Sun, 10 Dec 2000 06:02:28 -0600
This paper studies transaction costs changes arising from the introduction of the Internet in transactions between firms. We divide transaction costs into coordination costs and motivation costs. We classify coordination efficiencies into three categories: process improvements, marketplace benefits, and indirect improvements. For motivation costs, we focus on informational asymmetries. We apply this framework to internal data from an Internet-based firm to measure process improvements, marketplace benefits, and motivation costs. Our results suggest potentially large process improvements and marketplace benefits. We find little evidence that informational asymmetries are more important in the electronic marketplace than in the existing physical ones.

Contractual Allocation of Decision Rights and Incentives: The Case of Automobile Distribution
Date Posted:Fri, 01 Dec 2000 00:00:00 -0600
We analyze empirically the allocation of rights and monetary incentives in automobile franchise contracts. All of these contracts substantially restrict the decision rights of dealers and grant manufacturers extensive rights to specify and enforce dealers' duties. The allocation of decision rights and incentive intensity differs across brands, however. This variation is explained by the incidence of moral hazard. In particular, when the cost of dealer moral hazard is higher and the risk of manufacturer opportunism is lower, manufacturers hold more rights to determine the performance required from their dealers and to use mechanisms such as monitoring, termination and monetary incentives to ensure that such performance is provided.

Hierarchies and the Organization of Knowledge in Production
Date Posted:Wed, 20 Sep 2000 20:24:42 -0500
This paper studies how communication allows for the specialized acquisition of knowledge. It shows that a knowledge-based hierarchy is a natural way to organize the acquisition of knowledge when matching problems with those who know how to solve them is costly. In such an organization, production workers acquire knowledge about the most common or easiest problems confronted, and specialized problem solvers deal with the more exceptional or harder problems. The paper shows that the model is ...