Organizational Targets in General Equilibrium

We build a general equilibrium model in which firms endogenously choose whether to target prices or quantities. We characterize how these choices of organizational targets depend on firms' uncertainty about microeconomic and macroeconomic factors. In equilibrium, the transmission of both nominal and real shocks hinges on firms' organizational targets. For example, under otherwise identical microfoundations, money is neutral under quantity targets and non-neutral under price targets. We further characterize how targets shape firms' strategic interactions and prove that the macroeconomic uncertainty that arises from each choice of targets reinforces incentives to choose that target. That is, choices of organizational targets are strategic complements. For this reason, monetary policy aimed at stabilization can backfire by inducing a regime shift that renders it ineffective. A simple quantification suggests that incentives over organizational targets can vary markedly at business-cycle frequencies and help explain the state-dependent pass-through of monetary shocks to prices and output.