Organizational Economics Fall 2020

Li studies the origins of bureaucratic capacity, both empirically and theoretically. They apply text analysis to Chinese historical records. From these records, they construct a novel dataset tracing the evolution of political institutions for over 1,300 years. The dataset uncovers a key empirical regularity: a meritocratic bureaucracy arose only after emperors established a strong "separation of powers" among provincial officials, an institution also correlated with a much lower frequency of revolts. To explain these findings, Li constructs a model where the central government faces a loyalty-competence trade-off: a competent governor can weaponize his competence to challenge the central government. Li shows that the central government resolves the trade-off by appointing a political governor and an economic governor to co-rule a province. Case studies further show that the separation between economic and political powers is an important hallmark in many stable autocracies.

Weber, Huitfeldt, Nimczik, and Kostol provide a new method to study how workers' career and wage profiles are shaped by internal labor markets (ILM) and job hierarchies in firms. The paper tackles the conceptual challenge of organizing jobs within firms into hierarchy levels by proposing a data-driven ranking method based on observed worker flows between occupations within firms. The researchers apply their method to linked employer-employee data from Norway that records fine-grade occupational codes and tracks contract changes within firms. The findings confirm existing evidence that is primarily based on case studies for single firms. The researchers expand on this by documenting substantial heterogeneity in the structure and hierarchy of ILMs across a broad range of large firms. The findings on wage and promotion dynamics in ILMs are consistent with models of careers in organizations.

Aldashev and Zanarone study the relative efficiency of state and private firms under different institutions. They argue that when political institutions are weak, the government must enter a relational "social contract" with firm owners and suppliers to guarantee them against expropriation. Moreover, when judicial institutions are weak, owners and suppliers must also enter relational "business contracts" with each other. In a state-owned firm, the government is a common party to both contracts, so relational capital can be efficiently concentrated by making it residual claimant of the firm's surplus. In a private firm, tension arises between the social contract, which calls for the government to be residual claimant, and the business contract, which calls for the firm's private owner to be residual claimant. Thus, although a private firm is potentially more productive than a state-owned firm, it may be less credible when both political and judicial institutions are weak. The model is consistent with the fact that privatizations succeeded in developing countries with stronger institutions but failed in those with weaker institutions, and with the fact that state firms in East-Asian countries became relatively less important as those countries reformed their political and judicial institutions.

Englmaier, Galdon-Sanchez, Gil, and Kaiser empirically examine whether management practices that work well during an economic boom are also effective in times of economic crisis, using plant-level survey data collected in Spain in 2006 just prior to the Great Recession. By employing unsupervised machine learning, the researchers leverage high-dimensional human resource policies at each plant to describe clusters of management practices ("management styles"). They establish a positive correlation of a management style associated with structured management with performance prior to the crisis starting in 2006. Even accounting for firm survival, this correlation turns negative during the financial crisis. Further results suggest that more structured management correlates with relatively higher holdings of non-liquid assets and lower employee turnover. This suggests that a structured management style allows firms to strive during a boom but may be an impediment to adjusting to rapidly deteriorating economic conditions.

Bar-Isaac, Jewitt, and Leaver analyze a model of adverse selection in labour markets. Workers vary in both match-specific and general productivity. Firms can shape the information available to rivals. Competition to recruit workers leads to an information structure that resembles outplacement: Potential employers learn a lot about workers who are bad matches, but little about those who are good matches. This involves considerable adverse selection but no inefficiency. This kind of information provision acts as a way for workers to effectively pay for efficient training. One consequence is that the wages of those who stay at a firm are, on average, higher than the wages of those who leave. This is in line with some empirical findings but in contrast to standard tests for adverse selection in labour markets.

Deb, Kuvalekar, and Lipnowski study project development and selection by an organization whose members prefer different projects. The organization faces a basic trade-off between fostering collaboration among its members and responding efficiently to projects' evolution. If the organization commits to choosing the project that is most profitable ex post, it undermines the members' motive to collaborate, causing ex-ante inefficiency. The researchers solve for the organization's optimal selection rule. It entails an early phase of intense competition, followed by a permanent regime of collaboration. In service to ex-ante optimality, arbitrarily severe ex-post inefficiencies must be tolerated.

Do workers from social groups with comparable productivity distributions obtain comparable lifetime earnings? Bardhi, Guo, and Strulovici study how a small amount of early-career discrimination propagates over time when workers' productivity is revealed through employment. Breakdown learning environments that track on-the-job failures grant a disproportionately large advantage to marginally more favored groups, whereas breakthrough learning environments that track successes guarantee comparable earnings to groups of comparable productivity. This discrepancy persists with large labor markets, flexible wages, inconclusive signals, and misspecified employer beliefs. Allowing for investment in productivity exacerbates inequality between groups under breakdown learning.

Drawing on a long-term institutional transition, Casari and Lisciandra provide a model that describes the progressive closure of more affluent societies to immigration in order to protect the wealth of insiders. This closure took the institutional form of patrilineal property rights. The researchers show how this institutional change can emerge locally, spread by contagion, and generate a situation where societies are locked into a gender-biased society. Only a centralized top-down intervention could restore gender equality in property rights. This pattern is presented through a model and exemplified through the historical situation of communities in the Italian Alps, where inheritance institutions over common property resources evolved over the course of six centuries (1200-1800). Through a computational model and historical data, the researchers uncover the mechanisms for this shift and show the gradual transition from an egalitarian to a patrilineal institutional regime.

In many organizations, employees enjoy significant discretion regarding project selection. If projects differ in their informativeness about an employee's quality, project choices will be distorted whenever career concerns are important. Madsen, Williams, and Skrzypacz analyze a model in which an organization can shape its employees' career concerns by committing to a system for allocating a limited set of promotions. The researchers show that the organization optimally overpromotes certain categories of underperforming employees, trading off efficient matching of employees to promotions in return for superior project selection. When organizations can additionally pay monetary bonuses, the researchers find that overpromotion is a superior incentive tool when the organization needs to offer high-powered incentives, otherwise, bonuses perform better.

How do civil service reforms affect the personnel outcomes and performance of government organizations? Moreira and Pérez study the consequences of the 1883 Pendleton Act on the functioning of the US customhouses. The act required customhouses with 50 or more employees to recruit workers through competitive exams, but exempted the smaller ones. The researchers collect personnel records and information on receipts and expenses to compare the functioning of exempted and nonexempted customhouses, before and after the reform. Employees in reformed customhouses stayed longer in their jobs and had stronger professional backgrounds. However, these improvements did not translate into greater cost-effectiveness at collecting revenue. The researchers explore the interplay between the reformed mid-tier bureaucrats and the non-reformed tiers of the bureaucracy as a potential explanation of why revenue per dollar spent did not increase with the reform.

Bilicka and Scur analyze the effect of firms' organizational capacity on tax planning behavior of multinational firms (MNEs). Better organizational practices improve productivity and hence should increase the taxable corporate income of firms. However, higher adoption of these practices may also enable more aggressive tax planning. The researchers show that subsidiaries of MNEs located in high tax countries report significantly lower profits and have higher incidence of bunching around zero returns on assets if they have better organizational practices. This is especially true for more tax-aggressive MNEs. Using an event study design, the researcheres find that firms with better practices are also more responsive to corporate tax rate changes. These responses are also driven by more tax aggressive MNEs. These patterns are consistent with organizational capacity partially driving profit shifting behavior. The researchers add a novel explanation for why some firms are more likely to engage in aggressive tax planning.

The allocation of decision rights within organizations can significantly impact firm outcomes. Kala uses a natural experiment to uncover the causal effects of granting managers of State Owned Enterprises (SOEs) more autonomy over several strategic decisions in India. They find that managers meaningfully exercise this autonomy and their decisions result in greater sales and profits. The paper makes two contributions. First, it empirically validates the theoretical prediction that delegation can be a superior alternative to communication within the firm. Second, it shows that large gains in SOE performance (driven by managers' career concerns) are possible without ownership changes.