Essays Contract Theory Organizational Economics

MECS 570-1: Organizational Economics I: Organizations and Markets

This is the first course in a two-course sequence in Organizational Economics. It provides an introduction to the field and focuses on issues of incentive provision, decision making, firm boundaries, organizational structures and processes, and the interaction between firm organization and the broader economy. Below is the syllabus, an outline of the course, and a series of lecture notes. The class meets in the Global Hub, room 4301 on Thursdays from 3:30pm-6:30pm. 

Syllabus

Lecture Notes

Collection of Lecture Notes for Spring, 2017: Contains all the notes below, a couple other topics from previous quarters, and a few topics from 570-2.

Introduction (Updated: September 21st, 2017)

Incentives in Organizations, Part I (Updated: September 21st 2017): Risk-Incentives Trade-off; Limited Liability; Misaligned Performance Measures

Incentives in Organizations, Part II (Updated: September 26th, 2017): Career Concerns; Relational Incentive Contracts

Competition and Organization  (Updated: January 19th, 2017): Competition and Managerial Incentives

Boundaries of the Firm, Part I (Updated: January 25th, 2017): Introduction; Transaction-Cost Economics

Boundaries of the Firm, Part II (Updated: February 2nd, 2017): Property Rights Theory; Foundations of Incomplete Contracts

Boundaries of the Firm, Part III (Updated: February 7th, 2017): Influence Costs

Boundaries of the Firm, Part IV (Updated: February 9th, 2017): Organizational Industrial Organization

Decision Making in Organizations, Part I (Updated: February 16th, 2017): Mechanism-Design Approach to Delegation

Decision Making in Organizations, Part II (Updated: February 21st, 2017): Delegating Non-Contractible Decisions

Organizational Structure, Part I (Updated: February 24th, 2017): Span of Control, Knowledge Hierarchies

Organizational Structure, Part II (Updated: February 28th, 2017): Knowledge Hierarchies and Inequality; Monitoring Hierarchies

Careers in Organizations (Updated: May 24, 2016): Internal Labor Markets

Performance Differences (Updated: May 13th, 2015): Productivity Measures

Relational Incentive Contracts (Updated: May 24th, 2015): Sequential Inefficiencies in Formal and Relational Contracts (by Dan Barron)

Schedule (updated September 21, 2017)

Week 1--Thurs, Sep 21: Introduction to Organizational Economics; Risk--Incentives Trade-off; Limited Liability

Week 2--Thurs, Sep 28: Misaligned Performance Measures; Career Concerns; Relational Incentive Contracts

Week 3--Thursday, Oct 5: Competition and Relational Incentive Contracts; Competition and Managerial Incentives

Week 4--Thurs, Oct 12: Discussion of Hewlett-Packard Case; Firm Boundaries; Transaction Cost Economics

Week 5--Thurs, Oct 19: Property Rights Theory; Foundations of Incomplete Contracts; Organizational IO
Sun, Oct 22: First model-development essay due

Week 6--Thurs, Oct 26: Communication; Mechanism-Design Approach to Delegation

Week 7--Thursday, Nov 2: Delegation with Non-Contractible Decisions; Centralization versus Decentralization

Week 8--Thursday, Nov 9: Span of Control; Knowledge Hierarchies; Knowledge Hierarchies in Equilibrium

Week 9--Thursday, Nov 16: Monitoring Hierarchies and Firm Size; Discussion of Limits of Organization and Firm Objectives

Week 10--Thursday, Nov 30: Internal Labor Markets
Sun, Dec 3Second model-development essay due

 

Sequence of Topics.

The structure of production.

  • Adam Smith, The Wealth of Nations. Oxford: Clarendon Press, Glasgow edition, 1976, Book I, Chapters I-III.
  • George Stigler, "The Division of Labor Is Limited by the Extent of the Market," Journal of Political Economy59(3): 185-193 (1951).
  • Axel Leijonhufvud, "Capitalism and the Factory System," in R. N. Langlois, ed., Economic as a Process: Essays in the New Institutional Economics. New York: Cambridge University Press, 1986.
  • Edward Ames and Nathan Rosenberg, "The Progressive Division and Specialization of Industries," The Journal of Development Studies1(4): 363-383 (1965).
  • Arthur L. Stinchcombe, Information and Organizations. Berkeley: University of California Press, 1990, chapter 2.
  • Richard N. Langlois, "Cognitive Comparative Advantage and the Organization of Work," Journal of Economic Psychology24: 187-207 (2003).
  • David H. Autor, Frank Levy, and Richard J. Murnane, “The Skill Content of Recent Technological Change: An Empirical Exploration.” Quarterly Journal of Economics, 118(4): 1279–1333 (2003).
  • David H. Autor, "The 'Task Approach' to Labor Markets: an Overview," Journal of Labour Market Research46(3): 185-199 (September 2013).
  • David H. Autor, "Polanyi's Paradox and the Shape of Employment Growth," National Bureau of Economic Research Working Paper Series No. 20485 (2014).

 Transaction-cost economics: overview. .

  • Oliver E. Williamson, The Economic Institutions of Capitalism. New York: The Free Press, 1985, chapters 1, 2, and 3.
  • Armen Alchian and Susan Woodward, "The Firm Is Dead; Long Live the Firm: A Review of Oliver E. Williamson's The Economic Institutions of Capitalism," Journal of Economic Literature26(1): 65-79 (March 1988).
  • Douglas W. Allen, “Transaction Costs,” in Boudewijn Bouckaert and Gerrit De Geest, eds., The Encyclopedia of Law and Economics, volume 1. Chelthenham, Edward Elgar, 2000, pp. 893-926..

 The Coasean approach.

  • Ronald H. Coase, "The Nature of the Firm," Economica (N.S.) 4: 386-405 (November 1937).
  • Ronald H. Coase, "The Nature of the Firm: Origin, Meaning, Influence," Journal of Law, Economics, and Organization4(1), Spring 1988, reprinted in Oliver E. Williamson and Sidney G. Winter, eds., The Nature of the Firm. New York: Oxford University Press, 1991.
  • Steven N. S. Cheung, "The Contractual Nature of the Firm," Journal of Law and Economics26(1): 1-21 (April 1983).
  • Carl Dahlman, "The Problem of Externality," Journal of Law and Economics22: 141-162 (1979).

 Moral hazard, monitoring, and measurement costs.

  • Yoram Barzel, "Measurement Costs and the Organization of Markets," Journal of Law and Economics25(1): 27-48 (April 1982).
  • Armen Alchian and Harold Demsetz, "Production, Information Costs, and Economic Organization," American Economic Review62(5), December 1972.
  • Michael C. Jensen and William H. Meckling, "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure," Journal of Financial Economics3: 305-360, 1976.
  • Bengt Holmstrom and Paul Milgrom, "Multi-Task Principal-Agent Analyses: Linear Contracts, Asset Ownership and Job Design," Journal of Law, Economics and Organization7: 24-52 (1991).

Asset specificity.

  • Benjamin Klein, Robert G. Crawford, and Armen Alchian, "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics21(2): 297-326 (1978).
  • Oliver E. Williamson, The Economic Institutions of Capitalism. New York: The Free Press, 1985, chapters 7 and 8.
  • Benjamin Klein, "Vertical Integration as Organizational Ownership: The Fisher Body-General Motors Relationship Revisited," Journal of Law, Economics, and Organization4(1): 199-213 (Spring 1988), reprinted in Oliver E. Williamson and Sidney G. Winter, eds., The Nature of the Firm. New York: Oxford University Press, 1991.
  • Richard N. Langlois and Paul L. Robertson, "Explaining Vertical Integration: Lessons from the American Automobile Industry," Journal of Economic History49(2): 361-375 (June 1989). (Langlois and Robertson, chapter 4.)
  • Susan Helper, John Paul MacDuffie, and Charles Sabel, "Pragmatic Collaborations: Advancing Knowledge while Controlling Opportunism," Industrial and Corporate Change 9(3): 443-488 (2000).
  • Symposium on the General Motors-Fisher Body case, Journal of Law and Economics, Vol. 43, No. 1, April 2000.
  • Benjamin Klein, "The Economic Lessons of Fisher Body-General Motors," International Journal of the Economics of Business14(1): 1-36 (February 2007).

Property rights theory (old and new).

  • Demsetz, Harold. 1967. “Toward a Theory of Property Rights,” American Economic Review57(2): 347‑359.
  • Buchanan, James M., and Yong J. Yoon. 2000. "Symmetric Tragedies: Commons and Anticommons," Journal of Law and Economics 43(1): 1-13.(April).
  • Henry E. Smith, "Semicommon Property Rights and Scattering in the Open Fields," The Journal of Legal Studies29(1): 131-169 (2000).
  • Sanford J. Grossman and Oliver D. Hart, "The Costs and Benefits of Ownership: A Theory of Vertical Integration," Journal of Political Economy94: 691-719 (1986).
  • Oliver D. Hart, "Incomplete Contracts and the Theory of the Firm," Journal of Law, Economics, and Organization4(1): 119-140 (Spring 1988) reprinted in Oliver E. Williamson and Sidney G. Winter, eds., The Nature of the Firm. New York: Oxford University Press, 1991.
  • Oliver D. Hart, "An Economist's Perspective on the Theory of the Firm," Columbia Law Review89(7): 1757-1774 (1989).
  • Jean Tirole, "Incomplete Contracts: Where Do We Stand?" Econometrica67(4):741-781 (July 1999).
  • Harold Demsetz,. "Review of Oliver Hart, Firms, Contracts, and Financial Structure," Journal of Political Economy 106: 446-452 (1998).
  • Kirsten Foss and Nicolai J. Foss, "Assets, Attributes, and Ownership," International Journal of the Economics of Business8: 19-37 (2001).
  • Ugo Pagano, "Public Markets, Private Orderings and Corporate Governance," International Review of Law and Economics20 453-477 (2000).

Summary (so far) and prospect.

Ownership.

  • Yoram Barzel, "The Entrepreneur's Reward for Self-Policing," Economic Inquiry25: 103-116 (1987).
  • Eugene F. Fama and Michael Jensen, "The Separation of Ownership and Control," Journal of Law and Economics 26(2): 301-27 (June 1983).
  • Eugene F. Fama and Michael Jensen, "Agency Problems and Residual Claims," Journal of Law and Economics 26(2): 327-50 (June 1983).
  • Henry Hansmann,"Ownership of the Firm," Journal of Law, Economics, and Organization4(2): 267-304 (Fall 1988).
  • Henry Hansmann, The Ownership of Enterprise. Cambridge: the Belknap Press, 1996.

  Dispersed knowledge and monitoring.

  • F. A. Hayek, "The Use of Knowledge in Society," American Economic Review35(4): 519-530 (1945).
  • Michael C. Jensen and William H. Meckling, "Specific and General Knowledge, and Organizational Structure," in Lars Werin and Hans Wijkander, eds., Contract Economics. Oxford: Basil Blackwell, 1992, pages 251-74 and in Journal of Applied Corporate Finance, Fall 1995.
  • Alanson P. Minkler, "The Problem With Dispersed Knowledge: Firms in Theory and Practice,"Kyklos46(4): 569-587 (1993).
  • Alanson P. Minkler, "Knowledge and Internal Organization," Journal of Economic Behavior and Organization21: 17-30 (1993).
  • Deborah A. Savage, "The Professions in Theory and History: the Case of Pharmacy," Business and Economic History 23(2): 129-160 (Winter 1994).
  • Deborah A. Savage and Paul L. Robertson, "The Maintenance of Professional Authority: The Case of Physicians and Hospitals in the United States," in Paul L. Robertson, ed., Authority and Control in Modern Industry. London: Routledge, 1998.
  • Todd R. Zenger and William S. Hesterly, "The Disaggregation of Corporations: Selective Intervention, High-Powered Incentives, and Molecular Units," Organization Science8(3): 209-222 (1997).

 Production costs redux: Economic capabilities.

  • Harold Demsetz, The Economics of the Business Firm. New York: Cambridge University Press, 1995, chapters 1 and 2.
  • Sidney G. Winter, "On Coase, Competence, and the Corporation," Journal of Law, Economics, and Organization4(1): 163-180 (Spring 1988), reprinted in Oliver E. Williamson and Sidney G. Winter, eds., The Nature of the Firm. New York: Oxford University Press, 1991.
  • Richard N. Langlois and Nicolai J. Foss, "Capabilities and Governance: the Rebirth of Production in the Theory of Economic Organization," Kyklos52(2): 201-218 (1999).
  • David J. Teece, Gary Pisano, and Amy Shuen, "Dynamic Capabilities and Strategic Management," Strategic Management Journal 18(7): 509-533 (August 1997).
  • Richard R. Nelson and Sidney G. Winter, An Evolutionary Theory of Economic Change. Cambridge: the Belknap Press, 1982, chapters 4 and 5.
  • Edith Penrose, The Theory of the Growth of the Firm. Oxford: Basil Blackwell, 1959. (Oxford edition, 1995.)
  • G. B. Richardson, "The Organisation of Industry," Economic Journal82(327): 883-896 (1972).
  • David J. Teece, "Economies of Scope and the Scope of the Enterprise," Journal of Economic Behavior and Organization1(3): 223 (1980).
  • David J. Teece, "Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing, and Public Policy," Research Policy15: 285-305 (December 1986).
  • C. K. Prahalad and Gary Hamel, "The Core Competence of the Corporation," Harvard Business Review, May-June 1990, pp. 7991

Organization and economic change.

  • Armen Alchian, "Uncertainty, Evolution, and Economic Theory," Journal of Political Economy 58(3): 211-221 (1950).
  • Joseph A. Schumpeter, Capitalism, Socialism, and Democracy. New York: Harper and Brothers, 1942, pp. 63-106.
  • Paul L Robertson and Lee J. Alston, "Technological Choice and the Organization of Work in Capitalist Firms," Economic History Review45(2): 330-49 (May 1992).
  • Richard N. Langlois and Paul L. Robertson, Firms, Markets, and Economic Change: A Dynamic Theory of Business Institutions. London: Routledge, 1995, chapters 2, 3, and 4.
  • Morris Silver, Enterprise and the Scope of the Firm. London: Martin Robertson, 1984, pp. 11-67.

 Modular systems and standards.

  • Paul A. David, "Clio and the Economics of QWERTY," American Economic Review 75(2): 332-337 (1985).
  • S. J. Liebowitz and Stephen E. Margolis, "The Fable of the Keys," Journal of Law and Economics 33(1): 1-25 (April 1990).
  • S. J. Liebowitz and Stephen E. Margolis, "Path-dependence, Lock-in, and History," Journal of Law, Economics, and Organization 11: 205-226 (1995).
  • Richard N. Langlois, "Modularity in Technology and Organization," Journal of Economic Behavior and Organization 49: 19-37 (2002).
  • Rebecca M. Henderson and Kim B. Clark, "Architectural Innovation: the Reconfiguration of Existing Product Technologies and the Failure of Established Firms," Administrative Science Quarterly35: 9 (March 1990).
  • Richard N. Langlois and Paul L. Robertson, "Networks and Innovation in a Modular System: Lessons from the Microcomputer and Stereo Component Industries," Research Policy21(4): 297-313 (1992). (Langlois and Robertson, chapter 5.)
  • Carliss Y. Baldwin and Kim B. Clark, "Managing in an Age of Modularity," Harvard Business Review, Sept.-Oct: (1997), pp. 84-93.
  • Carliss Y. Baldwin, "Where Do Transactions Come from?" Industrial and Corporate Change17(1): 155–195 (2008).
  • Richard N. Langlois and Giampaolo Garzarelli,"Of Hackers and Hairdressers: Modularity and the Organizational Economics of Open-source Collaboration," Industry & Innovation15(2): 125-143 (April 2008).
  • Richard N. Langlois, “The Secret Life of Mundane Transaction Costs,” Organization Studies27(9): 1389-1410 (2006).

The old economy and the new economy.

  • Alfred D. Chandler, "Organizational Capabilities and the Economic History of the Industrial Enterprise," Journal of Economic Perspectives6(3): 79-100 (1992).
  • Langlois and Robertson,Firms, Markets, and Economic Change: A Dynamic Theory of Business Institutions, chapters 6, 7, and 8.
  • Allyn A. Young, "Increasing Returns and Economic Progress," TheEconomic Journal38 (Dec. 1928), pp. 527-542..
  • Richard N. Langlois, "The Vanishing Hand: The Changing Dynamics of Industrial Capitalism," Industrial and Corporate Change, 12(2): 351-385 (April 2003).
  • Richard N. Langlois, "Chandler in a Larger Frame: Markets, Transaction Costs, and Organizational Form in History," Enterprise and Society 5(3): 355-375 (September 2004).

Business Groups.

 

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