How does increasing the skill of some workers affect the output of the organization as a whole? To answer this question, Espinosa and Stanton study the effects of a randomized training program that occurred in a Colombian government agency. While trained workers substantially improved their individual production, they find that spillovers affecting managers' productivity are nearly as large as the direct gains from training. The researchers use email data to understand the mechanism behind these spillovers and find that two changes explain the benefits for managers. First, trained workers send fewer emails to their bosses, and boss productivity increases as emails decline. Second, relatively senior trained frontline workers form an informal helping layer between junior frontline workers and managers, providing assistance to untrained workers and further reducing managers' need to offer help. In Espinosa and Stanton's setting, accounting for intra-organization spillovers doubles the implied return from upskilling workers.
Feng, Taylor, Westerfield, and Zhang study optimal project management in a setting where random setbacks arise naturally during development (e.g., software, construction, or manufacturing). The contractor can shirk, and the sponsor cannot observe the occurrence of setbacks and must rely on unverifiable reports. The optimal dynamic mechanism provides incentives via a cost-plus-award-fee contract featuring a soft deadline or time budget and a terminal payment that is linear in the time remaining on the schedule. Late-stage setbacks require randomization between project cancellation and extension. Because randomization may happen repeatedly, the project can run far beyond its original expected duration and budget and yet be canceled yielding no value. If commitment to randomization probabilities is not possible, the sponsor optimally commits more time and resources to the project, even though it is less valuable to her.Their analysis suggests that although overruns and cancellations are commonly viewed as failures of project governance, such outcomes are necessary features of optimal project management.
Deserranno, Leon-Ciliotta, and Kastrau study promotion incentives in the public sector by means of a field experiment with the Ministry of Health in Sierra Leone. The experiment creates exogenous variation in meritocracy by linking promotions to performance and variation in perceived pay progression among the lowest tier of health workers. The researchers find that meritocratic promotions lead to higher productivity, and more so when workers expect a steep pay increase. However, when promotions are not meritocratic, increasing the pay gradient reduces productivity through negative morale effects. The findings highlight the importance of taking into account the interactions between different tools of personnel policy.
Brandts and Cooper study the MS game, a novel coordination game played between a manager and two subordinates. Unlike commonly studied coordination games, the MS game stresses asymmetric payoffs (subordinates have opposing preferences over outcomes) and asymmetric information (subordinates are better informed than managers). Efficient coordination requires coordinating subordinates' actions and utilizing their private information. The researchers vary how subordinates' actions are chosen (managerial control versus delegation), the mode of communication (none, structured communication, or free-form chat), and the channels of communication (i.e. who can communicate with each other). Achieving coordination per se is not challenging, but total surplus only surpasses the safe outcome when managerial control is combined with three-way free-form chat. Unlike weak-link games, advice from managers to subordinates does not increase total surplus. The combination of managerial control and free-form chat works because subordinates rarely lie about their private information, making efficient coordination possible. This contrasts with findings from the experimental literature on lying.
This paper uses novel, firm-level measures derived from communications metadata before and after a CEO transition in 102 firms to study if CEO turnover impacts employees' communication flows. Impink, Prat, and Sadun Impink, Prat, and Sadun find that CEO turnover leads to an initial decrease in intra-firm communication, followed by a significant increase approximately five months after the CEO change. The increase is driven primarily by vertical (i.e. manager to employee) communication. Greater increase in communication after CEO change are associated with greater increases in firm market returns.
This paper was distributed as Working Paper 29042, where an updated version may be available.
Braguinsky, Ohyama, Okazaki, and Syverson explore how firms grow by adding products. They leverage detailed data from Japan’s cotton spinning industry at the turn of the last century to do so. This setting allows us to fully characterize the type of differentiation (vertical or horizontal) of new product introductions as well as whether the product is within or outside of the firm’s prior technological capabilities. The researchers find that trying to introduce innovative products beyond the firm’s previous technologically feasible set, even if such trials fail, is a key to firm growth. Indeed, it mostly facilitates growth through the firm’s later success in horizontal product diversification. In long-term outcomes, the right tail of the firm size distribution becomes dominated by firms first moved into technologically challenging products and then later applied their newly acquired technical competence to horizontal expansion of their product portfolios. Two mechanisms through which this knowledge transfer occurs are greater production system flexibility and higher product appeal to downstream buyers.
Formal rules and civic capital interact with each other, but we know little about the effect of this interaction on economic outcomes. Rustagi fills this gap using the context of a forest commons management program in Ethiopia. The program was launched to mitigate high deforestation from browsing of young trees by livestock. He measures civic capital as the propensity to cooperate if others do the same even though defection would yield a higher payoff. Formal rules are measured as written down regulations on grazing inside the forest. The researcher finds that groups achieve best forest outcomes when they have both rules and civic capital, but not when the have only one of these. Insights from fixed effects, neighboring pairs, and forest ecology show that these effects are not due to omitted variables. Specifically, the effects are observed only for young broadleaf trees prone to browsing, but not for coniferous trees that the cattle avoid. Among the young broadleaf trees, the largest effect is observed for species highly susceptible to browsing. Survey and experimental data reveal that these results are due to the enforcement of rules by the civic minded, which deters free riding, fosters optimistic beliefs about others’ contributions, eventually resulting in higher cooperation. These findings imply that both rules and civic capital are required for successful cooperation outcomes.
The operation of markets and of politics are in practice deeply intertwined. Political decisions set the rules of the game for market competition and, conversely, market competitors participate in and influence political decisions. Callander, Foarta, and Sugaya develop an integrated model to capture the circularity between the two domains. The researchers show that a positive feedback loop emerges such that market power begets political power in a positive feedback loop, but that this feedback loop is bounded. With too much market power, the balance between politics and markets itself becomes lopsided and this drives a wedge between the interests of a policymaker and the dominant firm. Although such a wedge would seem pro-competitive, Callander, Foarta, and Sugaya show how it can exacerbate the static and dynamic inefficiency of market outcomes. More generally, their model demonstrates that intuitions about market competition can be upended when competition is intermediated by a strategic policymaker.
Markets in low-income countries often display long tails of inefficient firms and significant misallocation. This paper studies Rwandan coffee mills, an industry initially characterized by widespread inefficiencies that has recently seen a process of consolidation in which exporters have acquired control of a significant number of mills giving rise to multi-plant groups. Macchiavello and Morjaria combine administrative data with original surveys of both mills and acquirers to understand the consequences of this consolidation. Difference-in-difference results suggest that, controlling for mill and year fixed effects, a mill acquired by a foreign group, but not by a domestic group, improves both productivity and product quality. The difference in performance is not accompanied by changes in mill technology or differential access to capital. Upon acquisition, both foreign and domestic group change mills' managers. Foreign groups, however, recruit younger, more educated and higher ability managers, pay these managers a higher salary (even conditional on manager and mill characteristics) and grant them more autonomy. These “better” managers explain about half of the better performance associated with foreign ownership. The difference in performance reflects superior implementation, rather than management knowledge: following an acquisition, managers in domestic and foreign groups try to implement the same management changes but managers in domestic groups report significantly higher resistance from both workers and farmers and fail to implement the changes. The results have implications for researchers' understanding of organizational change and for fostering market development in emerging markets.
Gieczewski and Kosterina study policy experimentation in organizations with endogenous membership. An organization initiates a policy experiment and then decides when to stop it based on its results. As information arrives, agents update their beliefs, and become more pessimistic whenever they observe bad outcomes. At the same time, the organization's membership adjusts endogenously: unsuccessful experiments drive out conservative members, leaving the organization with a radical median voter. The researchers show that there are conditions under which the latter effect dominates. As a result, policy experiments, once begun, continue for too long. In fact, the organization may experiment forever in the face of mounting negative evidence. This result provides a rationale for obstinate behavior by organizations, and contrasts with models of collective experimentation with fixed membership, in which under-experimentation is the typical outcome.
Bowen, Hwang, and Krasa study a dynamic bargaining model between a fixed agenda-setter and responder over successive issues. If the responder rejects the setter's proposal, the setter can attempt to assert her will to implement her ideal and will succeed with a probability that depends on her "personal power". The players learn about the setter's power as gridlock persists. Gridlock occurs when the setter's perceived power is either too high or too low, and the players reach compromise in an intermediate interval of beliefs. The presence of "difficult" issues can induce more compromise as the players have incentives to avoid learning.
This paper was distributed as Working Paper 27981, where an updated version may be available.
Bai, Jia, Li, and Wang study whether talented individuals are more or less likely to create firms, linking administrative college admissions data for 1.8 million individuals with information on firm registration records in China. The data reveals that most of the variation in firm creation is from within college. Given the same college, the researchers find that individuals with higher college entrance exam scores - the most important measure of talent in this context - are less likely to create firms. Moreover, this negative relationship is even stronger for groups with social and economic advantages such as men, urban individuals, and those from better high schools. Bai, Jia, Li, and Wang propose three hypotheses for why students with higher-scores are less likely to create firms: the lower entrepreneurial ability hypothesis, the opportunity cost hypothesis and the risk attitude hypothesis. The data favors the opportunity cost hypothesis (i.e. higher-score individuals are attracted away by non-entrepreneur sectors, even though they might have higher entrepreneurial ability). Moreover, the exam score to firm creation relationship varies greatly across province and industry according to the importance of the state sector, indicating the scope for improvement in talent allocation.
This paper was distributed as Working Paper 28865, where an updated version may be available.
Much economic activity in developing countries takes place in groups whose members are associated through social networks. Group sales can connect small-scale producers to broader markets, but introduce opportunities for free-riding. Rao and Shenoy explore the effect of collective incentives on group production among rural Indian dairy cooperatives. In a randomized evaluation, the researchers find village-level cooperatives can solve internal collective action problems to improve production quality. However, some village elites decline payments when they cannot control information disclosure. Opting out reflects frictions in allocating surplus within a social network, and suggests some transparency-based efforts to limit elite capture may undermine policy goals.