Organizational Economics

May 13 and 14, 2016
Robert S. Gibbons of MIT, Organizer

Raymond Fisman, Boston University and NBER; J. Shi, RMIT University; Y. Wang, University of Southern California; and R. Xu, Renmin, University of China

Social Ties and Favoritism in Chinese Science

Fisman, Shi, Wang, and Xu study the role of favoritism in the election of fellows to the Chinese Academies of Sciences and Engineering (CAS/CAE), appointments that confer considerable prestige and resources, over the years 2001-2013. The researchers' analysis focuses on hometown ties — a common source of favor-exchange in Chinese culture — to the CAS/CAE department standing committees which exercise control over the fellow selection process. Nominees from the same hometown as at least one committee member are 36 percent more likely to be selected as CAS/CAE fellows. This effect is much stronger in the early years of the sample, before the implementation of election rules and greater transparency that were designed to end favoritism in the selection process. They next disaggregate the selection process into the initial screening phase and the following vote among short-listed candidates. The advantage of hometown ties is observed only in the latter stage, consistent with in-person lobbying playing an important role in generating the researchers' main results. Favoritism leads to lower-quality applicants gaining election to the CAS/CAE: The publication quality of elected nominees is far higher than non-elected nominees for candidates without hometown ties, while the publication records of elected and non-elected nominees are no different among hometown-connected candidates.

Daniel Carpenter, Harvard University

Recruitment by Petition

Carpenter studies why petitions flourish when they are often denied if not ignored by the sovereigns who receive them. When activists seek to build political organizations in network-rich but information-poor environments, petitioning as institutional technology facilitates recruitment. A petition's signatory list identifies and locates individuals sympathetic to its prayer and expresses to other citizens who and how many agree with the prayer. Three historical moments – the explosion of antislavery petitioning in the antebellum United States, the emergence of Protestantism in sixteenth-century France, and England's suppression of petitioning after the Restoration Settlement of 1660 – provide vivid demonstrations of the theory. A recruitment-based theory implies that petition drives mobilize as much as they express, that well-established groups and parties petition less frequently, and that the most important readers of a petition are those asked to sign it. Contemporary digital petitioning both routinizes and takes its force from the petition's embedded recruitment technology.

Charles Sabel, Columbiia University; Gary Herrigel, University of Chicago; and Peer Hull Kristensen, Copenhagen Business School

Regulation under Uncertainty: The Co-evolution of Industry and Regulation in the Norwegian Offshore Gas and Oil Industry

As production and design disintegrate and become more collaborative, involving dynamic relations between customers and firms supplying complex subsystems and service, products and production methods become more innovative but also more hazardous. The inadvertent co-production of latent hazards by independent firms is forcing firms and regulators to address more directly than before the problem of uncertainty: the inability to anticipate, much less assign a probability to future states of the world. Under uncertainty neither the regulator nor the regulated firms knows what needs to be done. The regulator must induce firms' to systematically canvas their practices and identify potential hazards. But recognizing the fallibility of all such efforts, the regulator must further foster the institutionalization of incident or event reporting procedures: systems to register failures in products or production processes that could be precursors to catastrophe; to trace out and correct their root causes; to alert others in similar situations to the potential hazard; and to ensure that countermeasures to ensure the safety of current operations are taken and the design requirements for the next generation of the implicated components or installations updated accordingly. In this essay we look closely at developments in the Norwegian offshore oil and gas industry and its regulator, the Petroleum Safety Authority (PSA) to better understand the co-evolution of vertically disintegrated industry and new forms of incident reporting based regulation.

Johannes Hörner, Yale University, and Nicolas S. Lambert, Stanford University

Motivational Ratings

Rating systems not only provide information to users but also motivate the rated agent. Hörner and Lambert solve for the optimal (effort-maximizing) rating system within the standard career concerns framework. It is a mixture two-state rating system. That is, it is the sum of two Markov processes, with one that reflects the belief of the rater and the other the preferences of the rated agent. The rating, however, is not a Markov process. The researchers' analysis shows how the rating combines information of different types and vintages. In particular, an increase in effort may affect some (but not all) future ratings adversely.

Brett Green, University of California at Berkeley, and Curtis Taylor, Duke University

Breakthroughs, Deadlines, and Self-Reported Progress: Contracting for Multistage Projects

Green and Taylor study the optimal incentive scheme for a multistage project in which the agent privately observes intermediate progress. The optimal contract involves a "soft deadline" wherein the principal guarantees funding up to a certain date — if the agent reports progress at that date, then the principal gives him a relatively short hard deadline to complete the project — if progress is not reported at that date, then a probationary phase begins in which the project is randomly terminated at a constant rate until progress is reported. Self-reported progress plays a crucial (but non-stationary) role in implementation. The researchers explore several variants of the model with implications for optimal project design. In particular, they show that the principal benefits by imposing a small cost on the agent in order to submit a progress report or by making the first stage of the project somewhat "harder" than the second. On the other hand, the principal does strictly worse by impairing the agent's ability to observe his own progress.

Gautam Rao, Harvard University and NBER; Stefano DellaVigna and Ulrike Malmendier, University of California at Berkeley and NBER; and John A. List, University of Chicago and NBER

Estimating Social Preferences and Gift Exchange at Work (NBER Working Paper No. 22043)

Rao, DellaVigna, List, and Malmendier design a model-based field experiment to estimate the nature and magnitude of workers' social preferences towards their employers. They hire 446 workers for a one-time task. Within worker, they vary (i) piece rates; (ii) whether the work has payoffs only for the worker, or also for the employer; and (iii) the return to the employer. The researchers then introduce a surprise increase or decrease in pay ('gifts') from the employer. They find that workers have substantial baseline social preferences towards their employers, even in the absence of repeated-game incentives. Consistent with models of warm glow or social norms, but not of pure altruism, workers exert substantially more effort when their work is consequential to their employer, but are insensitive to the precise return to the employer. Turning to reciprocity, the researchers find little evidence of a response to unexpected positive (or negative) gifts from the employer. Their structural estimates of the social preferences suggest that, if anything, positive reciprocity in response to monetary 'gifts' may be larger than negative reciprocity. They revisit the results of previous field experiments on gift exchange using their model and derive a one-parameter expression for the implied reciprocity in these experiments.

Frederico Finan, University of California at Berkeley and NBER; Benjamin A. Olken, MIT and NBER; and Rohini Pande, Harvard University and NBER

The Personnel Economics of the State (NBER Working Paper No. 21825)

Governments play a central role in facilitating economic development. Yet while economists have long emphasized the importance of government quality, historically they have paid less attention to the internal workings of the state and the individuals who provide the public services. This chapter reviews a nascent but growing body of field experiments that explores the personnel economics of the state. To place the experimental findings in context, Finan, Olken, and Pande begin by documenting some stylized facts about how public sector employment differs from that in the private sector. In particular, they show that in most countries throughout the world, public sector employees enjoy a significant wage premium over their private sector counterparts. Moreover, this wage gap is largest among low-income countries, which tends to be precisely where governance issues are most severe. These differences in pay, together with significant information asymmetries within government organizations in low-income countries, provide a prima facie rationale for the emphasis of the recent field experiments on three aspects of the state–employee relationship: selection, incentive structures, and monitoring. The researchers review the findings on all three dimensions and then conclude this survey with directions for future research.

Karen Bernhardt-Walther, University of Toronto

The First Time is Different: A Problem-Solving Approach to Innovation

Bernhardt-Walther models innovation as a problem solving process and characterize an innovation firm's optimal organizational and managerial choices. Many of these choices differ from those optimal for other problem solving processes, e.g., at hospitals, law firms, or in manufacturing. These differences are due to a difference in the nature of the problems the firms face: Solving an innovation problem means figuring out how to do something for the first time. Solving a legal, managerial, or medical problem means matching the problem to the appropriate known solution. The results show that sustainable innovation may not only be a question of how to stimulate idea generation, how to assess which ideas to pursue, or how to incentivize workers to pursue reasonable ideas - but may also hinge on optimal organization and management of knowledge workers.

Ryan Bubb, New York University; Supreet Kaur, Columbia University and NBER; and Sendhil Mullainathan, Harvard University and NBER

Enforcement Constraints in an Indian Village

In developing countries, economic activity is often predicated on informal arrangements between individuals—including risk sharing, credit access, employment contracts, and public goods provision. If contract enforcement is imperfect, concerns about ex-post reneging can lead to a break down in ex-ante trade. Bubb, Kaur, and Mullainathan study enforcement constraints in a setting with a high level of repeated interactions: irrigation sales among Indian farmers with neighboring landholdings. Using a field experiment, the researchers offered to subsidize the cost of irrigation between potential water buyer and seller pairs, with the subsidy payment to be delivered three months in the future. They vary the level of ex post enforcement by randomizing whether this payment would be delivered into the hands of the water buyer, or directly into the hands of the water seller. Under the Coasian benchmark, the amount of trade should not be affected by which party will receive the subsidy. However, consistent with enforcement constraints, the amount of irrigation is 58% higher under the Seller subsidy condition than the Buyer subsidy condition. Sellers use ex ante transfers— price discounts and trade credit—to induce trade in the Seller subsidy treatment, but not in the Buyer subsidy treatment. In contrast, there is little ex post sharing of the subsidy. Overall, buyers see an estimated 6% increase in their crop yield profits when the subsidy is delivered directly to the seller rather than to themselves. There is little evidence that potential correlates of relational contracting—such as previous trading history or being in the same subcaste—equalize trade under the two treatments. The findings suggest that within the context of the experiment, contract enforceability is a first-order impediment to realizing the gains from trade.

Oriana Bandiera, London School of Economics; Stephen Hansen, American Association for the Advancement of Scienc; Andrea Prat, Columbia University; and Raffaella Sadun, Harvard University and NBER

CEO Behavior and Firm Performance

Bandiera, Hansen, Prat, and Sadun measure the behavior of over 1,100 CEOs in six countries (Brazil, France, Germany, India, U.K. and U.S.) using a new methodology that combines (i) a survey that records each activity the CEOs undertake in a random work-week and (ii) a machine learning algorithm that projects these high dimensional data onto one CEO behavior index. A simple firm-CEO matching model yields the null hypothesis that, in absence of matching frictions, CEO behavior is uncorrelated with firm performance. Combining the CEO behavior index with firm level accounting data, the researchers reject this null. They find a large and significant correlation between CEO behavior and firm performance, which appears gradually over time after the CEO is appointed and is stronger in poorer regions. Structural estimates of the share of mismatched firm-CEO pairs reveal that eliminating matching frictions would have a large effect on productivity.