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Organizing Modular Production
Author(s):
Niko Matouschek, Northwestern University
Michael L. Powell, Northwestern University
Bryony Reich, Northwestern University
Discussant(s):
Andrea Prat, Columbia University
Abstract:

Matouschek, Powell, and Reich characterize the optimal communication network in a firm with a modular production function, which the researchers model as a network of decisions with a non-overlapping community structure. Optimal communication is characterized by two nested hierarchies that determine whom each agent receives information from and sends information to. Receiver rank depends only on the cohesion of an agent's module while sender rank also depends on the decision-specific value of adaptation. Matouschek, Powell, and Reich provide conditions for the Mirroring Hypothesis to hold and show that optimal communication is consistent with a core-periphery structure in which the core is formed by the most cohesive modules.

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Shared Models in Networks, Organizations, and Groups
Author(s):
Joshua Schwartzstein, Harvard University
Adi Sunderam, Harvard University and NBER
Discussant(s):
Alessandro Bonatti, Massachusetts Institute of Technology
Abstract:

Why did the market rise yesterday? What are the implications of the latest school shooting? Why did a particular employee get promoted? To answer such questions, Schwartzstein and Sunderam often exchange models, stories, narratives, and interpretations with others. This paper provides a framework for thinking about such social exchanges of models. The key assumption, following Schwartzstein and Sunderam (2021), is that when people are exposed to multiple interpretations they adopt the one that best explains the data. A key implication is that within a network interpretations evolve. This evolution driven by social learning hardens reactions to data that are open to interpretation: following the exchange of models, people are more convinced they are able to explain the data. Thus, people in different networks can not only end up with vastly different beliefs, but in a sense be puzzled by the fact that others outside their network have different beliefs. For certain network structures, the researchers show that social learning also mutes reactions to data that are open to interpretation: the exchange of models leaves beliefs closer to priors than they were before. Beyond studying fixed networks, Schwartzstein and Sunderam also consider how firm managers, politicians, and other agents are able to influence patterns of communication to their advantage. Agents who benefit from muting or broadly shared understandings will encourage a robust exchange of interpretations; agents who instead want new data to change behaviors will try to limit the exchange of interpretations, especially interpretations that suggest the data are not surprising. Schwartzstein and Sunderam apply the framework to consider the goal and structure of meetings in organizations, as well as the evolution and persistence of myths in social networks.

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A Theory of Power Structure and Institutional Compatibility: China vs. Europe Revisited
Author(s):
Ruixue Jia, University of California, San Diego and NBER
Gérard Roland, University of California, Berkeley and NBER
Yang Xie, University of California, Riverside
Discussant(s):
Saumitra Jha, Stanford University
Abstract:

The literature on institutions and development contrasts inclusive societies with extractive ones, while the scholarship comparing Imperial China and Premodern Europe defies this dichotomy. To reconcile these views, Jia, Roland, and Xie model the institutional differences between the two societies along two dimensions of their power structure: the Ruler's absolute power was weaker in Europe, whereas the Elite-People relationship in terms of their power and rights was more balanced in China. Their model shows that a more balanced Elite-People relationship can be compatible with a more absolutist Ruler. The model also helps interpret differences in specific institutions and autocratic stability.

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This paper was distributed as Working Paper 28403, where an updated version may be available.

"Potential" and the Gender Promotion Gap
Author(s):
Alan M. Benson, University of Minnesota
Danielle Li, Massachusetts Institute of Technology and NBER
Kelly Shue, Yale University and NBER
Discussant(s):
Heather Sarsons, University of Chicago and NBER
Abstract:

Benson, Li, and Shue show that widely-used subjective assessments of employee "potential" contribute to gender gaps in promotion and pay. Using data on 30,000 management-track employees from a large retail chain, Benson, Li, and Shue find that women receive substantially lower potential ratings despite receiving higher job performance ratings. Differences in potential ratings account for 30-50% of the gender promotion gap. Women's lower potential ratings do not appear to be based on accurate forecasts of future performance: women outperform male colleagues with the same potential ratings, both on average and on the margin of promotion. Yet, even when women outperform their previously forecasted potential, their subsequent potential ratings remain low, suggesting that firms persistently underestimate the potential of their female employees.

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The Perfect Match: Assortative Matching in Mergers and Acquisitions.
Author(s):
Veronica Rappoport, London School of Economics
Bernard Salanié, Columbia University
Catherine Thomas, London School of Economics
Discussant(s):
Chad Syverson, University of Chicago and NBER
Abstract:

Guadalupe, Rappoport, Salanié, and Thomas interpret M&A deals in Western Europe during the 2000s as the equilibrium of a matching process and apply recently developed empirical methods to infer features of the merger surplus function that rationalizes the observed partner matching. The researchers find revenue productivity is complementary to merger partner input scale, consistent with mergers allowing efficient reallocation of assets within firm boundaries. However, in their sample, complementarity in revenue productivities contributes significantly more to merger surplus, especially for mergers between firms in similar industries, suggesting mergers between productive firms generate gains beyond those derived from reallocating existing resources. For the subset of merged firms where post-merger data is also available, revenues, scale, productivity, and profits all exceeded counterfactual estimates in the first few years after the merger, and the observed productivity gains are positively correlated with the surplus estimated in the matching model.

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Knowledge Teams, Careers, and Gender
Author(s):
Cagatay Bircan, European Bank for Reconstruction and Development
Guido Friebel, Goethe University Frankfurt
Tristan Stahl, Goethe University Frankfurt
Discussant(s):
Ghazala Azmat, Sciences Po
Abstract:

What are the mechanisms of promotion gaps in knowledge work. Bircan, Friebel, and Stahl investigate a uniquely detailed data set on 10,000 financial projects in an international financial institution. The researchers find that independently from having children, women have significantly slower careers. Crucial for careers are assignments to the job of operational leader in teams that provide visibility to the upper echelons of the organization. Assignments to these jobs, however, appear to favor men.

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Outsourcing Scope and Cooperation: Evidence from Airlines
Author(s):
Nicholas Argyres, Washington University in St. Louis
Ricard Gil, Queen's University
Giorgio Zanarone, Washington University in St. Louis
Discussant(s):
Claudine M. Gartenberg, University of Pennsylvania
Abstract:

This paper provides evidence that broad outsourcing scope, whereby a buyer assigns a large share of its outsourced activities to a single supplier, increases both parties' willingness to cooperate with each other. Argyres, Gil, and Zanarone also provide evidence that the effect of such broad scope on mutual cooperation is greater when externalities between suppliers, which are internalized in broad scope relationships, are more important. The researchers document these effects in the context of outsourcing agreements between major and regional airlines in the US, where they measure cooperation as landing time slot exchanges during inclement weather. Because outsourcing scope - the share of a major's routes that are assigned to a regional - varies across airports within a given outsourcing relationship, Argyres, Gil, and Zanarone are able to include relationship fixed effects in their regressions. This rare feature of their data allows us to separate the externality internalization mechanism from alternative mechanisms that operate at the interorganizational relationship level, and hence do not vary within a relationship, including dependence balancing, self-enforcing agreements, and interorganizational trust. To the best of their knowledge, this is the first empirical study showing that broad outsourcing scope governs bilateral interfirm cooperation, and isolating a precise mechanism through which it does so.

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Organizational Structure and Pricing: Evidence from a Large U.S. Airline
Author(s):
Ali Hortaçsu, University of Chicago and NBER
Olivia R. Natan, University of California, Berkeley
Hayden Parsley, University of Texas at Austin
Timothy Schwieg, University of Chicago
Kevin R. Williams, Yale University and NBER
Discussant(s):
Robert S. Gibbons, Massachusetts Institute of Technology and NBER
Abstract:

The availability of large amounts of data and improvements in computational technology have allowed firms to develop sophisticated pricing and allocation systems. However, decision rights within these systems are often allocated across different organizations/divisions within the firm. Hortaçsu, Natan, Parsley, Schwieg, and Williams study how organizational boundaries affect pricing decisions using comprehensive data provided by a large U.S. airline. Contrary to prevailing theories of the firm, the researchers show that advanced pricing algorithms have multiple biases. These biases can be attributed to the various teams responsible for managing pricing algorithm inputs. To quantify the impacts of these biases, Hortaçsu, Natan, Parsley, Schwieg, and Williams estimate a structural demand model that combines sales and search information. The researchers recover the demand curves the firm believes it faces using detailed forecasting data. In counterfactuals, Hortaçsu, Natan, Parsley, Schwieg, and Williams show that correcting biases introduced by teams individually have little impact on market outcomes, but addressing all biases simultaneously leads to higher prices and increased dead-weight loss in the markets studied. Their results suggest that decentralized decision making can curtail a firm's ability to set optimal prices.

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Gender and Choice over Co-workers: Experimental Evidence
Author(s):
Shan Aman-Rana, University of Virginia
Clement Minaudier, University of Vienna
Brais Alvarez Pereira, Universidade NOVA SBE
Shamyla Chaudry, Lahore School of Economics
Discussant(s):
Katherine B. Coffman, Harvard University
Abstract:

Aman-Rana, Minaudier, Alvarez Pereira, and Chaudry study whether choice over co-workers matters for performance in gender-diverse teams. The researchers carried out a lab-in-the-field experiment where students were randomly assigned co-workers meant to help them perform on tests. Co-worker allocation was randomized on two dimensions: (1) gender and (2) student preference for that co-worker at baseline. Aman-Rana, Minaudier, Alvarez Pereira, and Chaudry find that randomly chosen male co-workers reduce the performance of females (12% of the average score), while preferred male co-workers have a positive yet statistically insignificant effect (6% of the average score). These effects are heterogeneous across the gender stereotype of the questions and materialize even though the two types of male co-workers have the same average ability. To investigate the mechanism behind these effects, they randomly allocated hints as an additional source of information across questions. Aman-Rana, Minaudier, Alvarez Pereira, and Chaudry find that some (but not all) of these differences are driven by difficulty in accessing those hints in the presence of random male co-workers.

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Subversive Conversations
Author(s):
Nemanja Antic, Northwestern University
Archishman Chakraborty, Yeshiva University
Rick Harbaugh, Indiana University
Discussant(s):
Margaret Meyer, Oxford University
Abstract:

Two players with common interests exchange information to make a decision. Their communication is scrutinized by an observer with different interests who understands the meaning of all messages and may object to the decision. Antic, Chakraborty, and Harbaugh show how the players can implement their ideal decision rule using a back and forth conversation. Such a subversive conversation reveals enough information for the players to determine their best decision, but not enough information for the observer to determine whether the decision was against his interest. Their results provide a theory of conversations based on deniability in the face of possible public outrage.

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Union Leaders: Experimental Evidence from Myanmar
Author(s):
Laura E. Boudreau, Columbia University
Rocco Macchiavello, London School of Economics
Virginia Minni, London School of Economics
Mari Tanaka, Hitotsubashi University
Discussant(s):
Supreet Kaur, University of California, Berkeley and NBER
Abstract:

Economic theory suggests that leaders may play a key roles in enabling social movements to overcome collective action problems through a variety of distinct mechanisms. Empirical tests of these theories outside the lab are scarce due to both measurement and identification challenges. Boudreau, Macchiavello, Minni, and Tanaka conduct multiple field experiments to test theories of leadership in the context of Myanmar's burgeoning labor union movement. Boudreau, Macchiavello, Minni, and Tanaka collaborate with a confederation of labor unions as it mobilizes garment workers in the run-up to a national minimum wage negotiation. The researchers present three sets of results. First, Boudreau, Macchiavello, Minni, and Tanaka document that union leaders differ from union members and non-members along several traits that psychologists and organizational sociologists have associated with ability to influence collective outcomes. Second, they randomly embed leaders in group discussions on workers' preferred and expected minimum wage levels. A leader's presence in the group improves group engagement and increases workers' consensus around the unions' preferred minimum wage levels. Third, Boudreau, Macchiavello, Minni, and Tanaka conduct a mobilization experiment in which workers are invited to participate in an unannounced activity that features strategic complementarity in turnout. Leaders influence participation through both coordination and social pressure mechanisms rather than by simply motivating workers.

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Ideology and Performance in Public Organizations
Author(s):
Jorg L. Spenkuch, Northwestern University
Edoardo Teso, Northwestern University
Guo Xu, University of California, Berkeley and NBER
Discussant(s):
Diana Moreira, University of California at Davis
Abstract:

Spenkuch, Teso, and Xu combine personnel records of the United States federal bureaucracy from 1997-2019 with administrative voter registration data to study how ideological alignment between politicians and bureaucrats affects the personnel policies and performance of public organizations. The researchers first show three stylized facts on the ideological preferences of federal bureaucrats. (i) Consistent with the use of the spoils system to align ideology at the highest levels of government, they find significant partisan cycles and substantial turnover among political appointees. (ii) By contrast, Spenkuch, Teso, and Xu find virtually no political cycles in the civil service. The lower levels of the federal government resemble a "Weberian" bureaucracy that appears to be largely insulated from partisan cycles. (iii) Democrats make up the plurality of civil servants. Overrepresentation of Democrats increases with seniority, with the difference in career progression being explained by positive selection on observables. Spenkuch, Teso, and Xu then show that political misalignment carries a sizeable performance penalty. Exploiting presidential transitions as a source of "within bureaucrat" variation in the political alignment of procurement officers over time, the researchers find that contracts overseen by a misaligned officer exhibit higher cost overruns. Spenkuch, Teso, and Xu provide evidence that is consistent with a general "morale effect," whereby misaligned bureaucrats are less motivated to pursue the organizational mission. Their results thus help to shed light on the costs of ideological misalignment within public organizations.

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This paper was distributed as Working Paper 28673, where an updated version may be available.

The Political Economy of Policy Experimentations in China
Author(s):
Shaoda Wang, University of Chicago
David Y. Yang, Harvard University and NBER
Discussant(s):
Ruixue Jia, University of California, San Diego and NBER
Abstract:

Many governments have engaged in policy experimentation in various forms to resolve uncertainty and facilitate learning. However, little is understood about the characteristics of policy experimentation, and how the structure of experimentation may affect policy learning and policy outcomes. Wang and Yang aim to describe and understand China's policy experimentation since 1980, among the largest and most systematic in recent history. The researchers collect comprehensive data on policy experimentation conducted in China over the past four decades. Wang and Yang find three main results. First, more than 80% of the experiments exhibit positive sample selection in terms of a locality's economic development, and much of this can be attributed to misaligned incentives across political hierarchies. Second, local politicians allocate more resources to ensure the experiments' success, and such effort is not replicable when policies roll out to the entire country. Third, the presence of sample selection and strategic effort is not fully accounted for by the central government, thus affecting policy learning and distorting national policies originating from the experimentation. Taken together, these results suggest that while China's bureaucratic and institutional conditions make policy experimentation at such scale possible, the complex political environments can also limit the scope and bias the direction of policy learning.

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Employment as a Relational Obligation to Work
Author(s):
Michael Raith, University of Rochester
Discussant(s):
Elliot Lipnowski, Columbia University
Abstract:

This paper compares employment with spot trade of labor, formalizing arguments by Coase, Simon, and Williamson. With spot trade, an entrepreneur and a wealth-constrained worker bargain over different actions, and without agreement there is no trade. Employment is a relational contract that gives the entrepreneur the authority to choose the worker's actions. Because of incomplete information about benefits and costs, either spot trade or employment may lead to inefficient outcomes. Raith derives a wide range of results about the entrepreneur's optimal choice between employment and spot trade. Employment is more efficient than spot trade the greater is the quasi-rent between the parties. Additionally, employment enables the entrepreneur to minimize the worker's rent. On the other hand, a wage premium is required to ensure the worker's obedience. His results suggest that the worker's obligation to provide his service is essential to the nature of employment. By contrast, whether the worker has multiple tasks, or the entrepreneur has an information advantage, or the entrepreneur owns important assets, all matter much less than the literature has suggested. The model also provides a simple theory of the firm that captures key ideas of transaction-cost economics.

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Participants

Brais Alvarez Pereira, Universidade NOVA SBE
Shan Aman-Rana, University of Virginia
Nemanja Antic, Northwestern University
Nicholas Argyres, Washington University in St. Louis
Ghazala Azmat, Sciences Po
Iwan Barankay, University of Pennsylvania
Daniel V. Barron, Northwestern University
Cagatay Bircan, European Bank for Reconstruction and Development
Ines Black, Duke University
Jordi Blanes, London School of Economics
Laura E. Boudreau, Columbia University
Archishman Chakraborty, Yeshiva University
David J. Cooper, University of Iowa
Florian Englmaier, University of Munich
Miguel Espinosa, Bocconi University
Claudine M. Gartenberg, University of Pennsylvania
Rick Harbaugh, Indiana University
Marco LiCalzi, Ca' Foscari University of Venice
Elliot Lipnowski, Columbia University
Niko Matouschek, Northwestern University
Kieron Meagher, Australian National University
Margaret Meyer, Oxford University
Clement Minaudier, University of Vienna
Virginia Minni, London School of Economics
Michael Raith, University of Rochester
Joao Ramos, University of Southern California
Heikki Rantakari, University of Rochester
Tristan Stahl, Goethe University Frankfurt
Marta Troya-Martinez, New Economic School
Birger Wernerfelt, Massachusetts Institute of Technology
Giorgio Zanarone, Washington University in St. Louis

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