down all potential C and D that can affect B 2. Internal validity - A is really A and B is really B 3. Statistical integrity 4. Generelizability - how general are findings and theoretical framework in other contexts Four areas of interest in organizational studies: 1. Incentives and workers effort 2. Voluntary effort and reciprocity 3. Coordination 4. Leadership and hierarchy Voluntary effort and reciprocity in organizations Field experiment on how long reciprocity persists: behaviour of 30 participants in three conditions where all expected to earn 15 dollars an hour. Neutral paid 15$, kind paid 20 dollars and unkind paid 10 dollars. Participants don't know which they are. Result: people who earned the most worked the most, people paid less also worked less. Telling people what the others earn is unproductive. Coordination in organizations Coordination problems create inefficients when agents' behaviour are mismatched or when an inefficient set of practices permeate the organization. How do we overcome coordination problems? 1. Brandts and Cooper 2005 - minimum effort A leader urging players to move away from the secure but inefficient equilibrium towards an efficient one with a different level of communication, results however are heterogeneous - do not directly support or refute the theory. Each group ends up exerting minimum effort 2. Communication 3. Incentives 4. Managed growth (structure of teams) 5. Organization culture Introduction to randomized control trials RCT is an experiment designed to isolate the influence of a certain intervention or variable has on an outcome or event, taking out everything else. |Impact of the program or pre existing differences? Treatment individuals may have had different outcomes even if they had not been treated. What is the solution to this? Randomization Power of the design: probability of rejecting the null hypothesis when it is in fact false. Sample size plays a key role. How? Treatment and control group must have the same sample size. Practical design and implementation issues: level of randomizations - should one randomize over individuals or a larger group? Which factors should be taken into account? 1. Spillovers from treatment to comparison groups can bias the estimation of treatment effects, in such case randomization should capture treatment spillovers 2. Randomization at group level may be easier than individual level from operational POV, even if it requires larger samples Cross cutting designs: Several different treatments are tested simultaneously with randomizations being conducted. It's used to test a combination of interventions relative to comparison groups AND relative to each other. We have multiple hypotheses rather than one. It also significantly reduces costs! Data collection I want to collect baseline information before the RCT asking questions to all individuals. What is the value of a baseline survey? You want to make sure you create groups in a good way, to determine whether randomization was correct. Advantages of baseline surveys: 1. Generate control variables that will reduce the variability in final outcomes and therefore reduce sample size requirements reducing costs 2. Make it possible to examine interactions between the initial conditions and the impact of the program, to verify that the randomization was conducted appropriately and to test and refine data collection procedures Field experiments with firms A. Motivation of using RCTs or field experiments in firms? Firms operate in complex environments where some characteristics are hard to measure. This implies a huge challenge at uncovering casual relationships when understating the behaviour firms merely on observational data. B. What do they do? They illustrate how field experiments can address these challenges and provide new answers. - Experiments within firms Workers are the units of observations. Discuss how to solve agency problems, from incentive pay to social pressure and non monetary rewards - Experiments between firms The firm is the unit of obbservation. Discuss how FE have exogenously varied input availability to shed light on constraints firms face. Field experiments within firms? How can firms solve agency problems and motivate their employees? They can implement 1. Monitoring Employees decide their level of effort based on the marginal costs and benefits of shirking, and then employers can choose compensation and monitoring policies. Thus the more monitoring, the less shirking! This leads to three concerns - shirking behaviour is hard to detect since shirkers don't want to be caught, datas vary with other endogenous factors and unobserved factors like personal problems. Case study Nagin, Rebitzer, Sanders and Taylor (2002): Employees of a telephone firm must report numbers of successful solicitations and employer corroborated that information by calling back a fraction of calls reported as successful. If there were inconsistencies a deduction from weekly pay was made. What is optimal monitoring? Balance between reducing shirking behaviour of some workers and at the same time monitoring costs. Monitoring is not always feasible 2. Paying for performance 2 effects: (1) Incentive: increase the marginal benefit of effort (2) Selection: more productive employees are attracted to the firm Case study Lazear (2004): Selection effects explain half of the 44% increase in worker productivity that followed the introduction of piece rates Case study Bandiera, Barankay, Rasul study: Productivity is 50% higher under piece rates. Managerial bonuses increase both the mean and the dispersion of workers' productivity (Since they stay with more productive workers, which makes them more productive) When managers had wixed wages the average worker was more productive when they were managed by someone who developed a social connection with the, 3. Increasing motivation through better social relations or status reward Usually even more effective than monetary rewards. Case Study Ashraf Bandiera and Jack: 800 agents tried to sell condoms in urban compounds, those who received non monetary incentives sell twice as many as those who receive financial margins. Case study Barankay: Provision of individual performance feedback about relative performance reduced productivity of workers Case study Aghion and Tirole 1997: Distribution of authority is a determinant of incentives Field experiments between firms Seek to identify constraints of firms and thus narrow down the development process. Physical capital and access to finance: Mel, McKenzie and Woodruff: one reason why firms do not grow is because even if they want to access money they go to banks which say no because they don't trust them Credit friction - so they did an experiment and gave money to different businesses and found that each of these businesses were producing more or less a 5% monthly return to the additional capital and the return you pay to banks a month is less than 1%. SO if the bank gave the money they would have a rentability of 5% and would pay back the money, the bank simply doesn't give them the money because they have no reason to believe otherwise. Labor experiment: Case study (Bertrand and Mullainathan): Study the racial gap in labor market and found that white name resumes receive 50% more calbacks than black sounding ones, especially for high levels of qualification Conclusions: 1. Designs of FE have to be supported by economic theory and hypotheses must be testable 2. Selection of unit: static vs dynamic (do groups change or not) Incentives Firms are a nexus of contracts which try to align divergent interests and conflict arises. 1. Firm wants the worker to work but the worker is lazy 2. Shareholder wants short term returns but the firm wants long term ones 3. The firm wants suppliers to supply high quality inputs but supplier saves money An explicit contract specifies in verbally or inwriting what each party's obligations are. An implicit contract is a set of expectations each party has about the others' behaviour For fun: Examples of incentives going wrong: - President said to the army “for each guerrilla member you kill I pay you”, soldiers started killing peasants and dressing them as guerrilla members Kindergarten = sometimes parents were late at picking up children, they then imposed a fine for being late for each ex half hour. More and more parents were late and later this was because they were willing to pay for being late, you were offering a service. - Chicago schools look at performance in school: if students go well, we give bonus to teachers. They decided to make kids take general tests and teachers gave them answers - 19th century: British empire knew many British soldiers in the Indies were dying from snakes, we will tell the Indian population to kill snakes and for every snake we will pay them, Indians started breeding snakes to kil An empirical study: Bloom sadun and Van Reenen Argues management can be modelled as Y= AKaLBMY The model assumes that management is an entry endowment, when you start the firm you have either low or high managerial ability. Management depreciates over time, like K. Managerial ability is intangible it cannot be sold. The finding found the model is very parsimonious (closed) and fits the data well Conclusions: Measuring management is possible. Correlational and causal effect that management matters: Different managerial practices across firms Few companies have successfully competed on the basis of operational effectiveness, competitors can quickly imitate management techniques and the most generic solutions diffuse the fastest. 4 reasons explain this: 1. Lack of awareness - bad firms don't know that they are bad, there is no correlation between what they are and what they think they are a. How to overcome it? For treatment group you reveal the benefits of having a good quality management and for control group you do not, and then you ask both groups whether they want an intervention program. i. If you ask managers how important is management you receive varying responses. ii. Second you can measure number of mistakes managers do - people with higher education make fewer mistakes. iii. Third, some companies don't take certain decisions because their decision depends on what the governments does. iv. Finally treated companies are more likely to adjust their beliefs about benefit of management qualities and ask for intervention and improve performance. b. Age doesn't matter, male owners are more likely to adopt more business practices. The smarter the manager, the higher the adoption. Years of education high, more management practices. Recalling high, more adopting of practices. 2. Local skills gap - more educated people lead to better management (also better access to educated people) a. How to overcome it? Supply of universities within regions linked to management and skill premia, through formal management training courses, but effectiveness linked to delivery methods, acquisitions as direct transmission mechanisms - better managed firms more likely to m&a and improve management of target firm 3. Incentives - more competition brings more incentives to improve and better managerial practices. There is a positive correlation between competition and management in both public and private sector (US concrete industry, ironproducers, telecom supply industry). Less competition with badly managed firms a. Impact of family owned business on adoption of management practices? Tend to be chosen based on gender or order of birth not managerial competence, thus no competition and incentives to work well. However if the shareholder only claims the ownership title and not the manager one, he pays the ceo with competences to do it. 4. Organizational frictions Management practices are about knowing what to do, so when you don't know what to do it's impossible to state in the contract ex ante the future decision, nor can you verify the action ex post. Implementation depends on context - contracts are incomplete by definition. Most managerial practices are based on relational contract which is a contract in which the parties act because it is in their favour to do it that way. Adoption is based on relational contracts, understandings that the parties share about their roles in and revwards from cooperating together which cannot be enforced by the court. Andon Cord - problemsolving based on trust because of info asymmetry Trust and History Guiso Sapienza and Zingales 2010 Historical factors shape trust in and within each country: - Education: more educated tend to trust more - Ethnic fractionalization: the more different people are ethnically the less trust there is - Exposure to efficient authocratic regimes: Exposure to certain regimes makes you trust more or less - Regional differences in trust correlated with decentralized decision making - when I trust I delegate Trust and leadership behaviour Leader as a culture maker, culture is endogenously present. - Implies a view of corporate culture as endogenous to firm choices (some evidence in truck industry) - CEO behaviour as input to culture: shapes credibility and clarity of the relational contract between managers and employees Conclusions: management practices vary a lot across firms and countries and awareness, skills, organizational frictions and incentives can explain these differences. Basic is awareneness and complex it OF. Diffusion of practices is not frictionless Role of management in public sector Variations of performance in the public sector are imperfectly overcome. 1. Multitasking: workers can do A and B but if only performance A is evaluated 0 effort is put into B 2. Influence activities: people spend time in trying to influence who is gonna take the decision lobbying 3. Multiple principals: same employee has different bosses, division and firm - goals are not clear 4. Preferences: risk aversity limits incentives Measuring management in the public sector In the WMS we have data like 1. McCormack Proper and Smith Empirical Evidence 2013 a. Performance is measured through perceptions on teaching, research and good university guidelines in 112 universities b. Results: older research intensive unis score better than newer teacher focused unis, there is also huge heterogeneity within unis: because its difficult to know the right managerial practices the longer you've been in the market the better you understand what to implement 2. Fryer 2012 a. RCT on public schools with introduced training to teachers and managers which increased scores of students 3. Bloom, lemus, sadun and van reener 2015: Pupil outcomes correlated with higher management scores and affects student performance 4. Rasul and Rogger: Nigerian Civil Service, WMS survey across 60 organizations and resulted in increases in management score reduced performance. Increases in autonomy increased performance due to multitasking and intrinsic motivation There is also positive correlation between management and health outcomes in the world. 1. Hospitals with better management register lower heart attacks 2. Significant variation in managerial pay across hospitals, uncorrelated with hospital performance, the ones paying the most are not necessarily the most productive. 3. Considerable variation in pricing across and within hospitals and higher prices in less competitive areas 4. Heterogeneity in adoption of a revenue generating practice 5. Lot of cross country variation in hospital management and within country How can the management gap be closed in healthcare? The role of managerial training: selection to managerial roles is often based on seniority and not skills, no systematic managerial training once promoted, clinical leaders with management training associated with significantly higher management scores and better clinical outcomes (WMS) The role of CEOs: CEOs with clinical training are more effective in academic hospitals and CEOs with private sector bg more effective in competitive environments. Ongoing work in this area because no evidence of systematic differences due to CEOs in hospitals. Evidence in schools. Many outstanding questions: 1. Why are so many firms badly managed - what matters most? 2. How does management change over the firm's life cycle? 3. Are different management practices completementary or additive? 4. What is the role of leaders and culture? 5. How can organizational frictions be reduced in public sector? Personnel Economics 3 main fields of study: selection, incentive and exit Incentives: Firms want to maximize profits subject to constraints where PC: participation constraint (the worker prefers to participate because utility of that is greater) IC incentive compatibility constraint: utility of exerting higher effort is higher than not putting in the effort The firm will maximize profits subject to constraints given workers are risk averse, biggest implication: cannot make payments contingent to S, a large part of compensation has to be fixed. Payments can be absolute or relative, if contingent on performance. Utility is decreasing and concave in effort, increasing and concave in income, risk averse. Tradeoff between insurance and incentives. Function is concave when the less happy I am when I get an additional unit. Tournament theory (wages=MP) - Prizes fixed in advance and depend on relative performance - Larger spreads in wages at different levels motivate those at lower levels to put more effort - Optimal spread Matching firms and workers: labour has huge heterogeneity. Study selection process for firms matched to workers in two approaches: game theoretic models of asymmetric info and models of efficient matching with symmetric learning about worker productivity. Super star effect: small number of people dominate and have enormous payoff and gap increases overtime. Learning models, firms and workers are equally well informed and firms find out a lot about workers' productivity after recruitment. Standard model: yijt= ai + uit + eijt where a is the innate ability of the worker I and u is the match combination and e is productivity shock Asymmetric information models, how employees match to firms when one party is better informed: Common solutions 1. Costly signals to infer ability of applications 2. Self selection 3. Incentive schemes But they do not always bring efficient results, why? A firm could take advantage of highly productive workers avoiding their mobility, + discrimination Firing and displacement Firms cannot adjust wages to an employee's MP so we face wage compression (differences in marginal productivity are higher the wage diff.). And norms against nominal wage reductions (usually a decrease in MP doesn't decrease W). Firms can change their selection by layoffs but there are barries - legal or institutional How to determine level of compensation? In perfect scenario equate it to MP of labour. In imperfect scenario it’s a learning process. Farber and Gibbons - expected productivity depends on innate ability and observable characteristics such as education. They found a correlation between last and current wage also, that employer's learning plays a key role in development of wages. Conclusions Personnel economics is to learn about economics of HR policies, trade off between risk and incentives and etc. Questions for future: How important is that firms find the right workers for their particular context? Why do firms send employees to executive education training? What explains the lack of evidence to support the risk incentive trade off predicted by moral hazard models? Does JOB TESTING harm minority workers? In the 20 the century no tests for unskilled job applicants. Introduction of job testing improved quality of matches between firms and workers. Trade off between efficiency and equality. Better candidate selection comes at a cost of reduced opportunity for groups with lower average test scores. What do they do? Evaluate trade off between equality and efficiency. Consider two channels by which job testing affects worker assessments raising the precision of screening and changing beliefs. Workers duration (who took the tests) was longer than those who didn't. When employees know their employers better, they will stay longer. Minority applicants performed worse on the employment tests. Results speak only to firms' private gains from improved worker selection, no change in racial composition of hires. Productivity gains were equally large among minority and majority hires. Effects of HRM practices on productivity: A study of steel finishing lines Ichniowski, Shaw and Prennushi What do they do? Provide new empirical evidence on the productivity effects of alternative HRM practices How ? 1. Minimize heterogeneity by collecting a unique data set on a sample of steelmaking operations 2. Conduct field interview on HRM practices, performance of finishing lines, inputs of production process and wage data 3. Estimate productivity and consider fixed effects Conclusion: Innovative HRM raises worker productivity and tend to be complements. Innovative changes have large effects while changes in individual employment practices (in contrast to systematic) have little to no effect Impact of Blind Auditions on Female Musicians, Goldin and Rouse 2000 Discrimination of music directors against women. Study of preiminary semifinal and final rounds of hiring process found that interaction between female and blind is sign positive. If a woman conducted the test blindly she has more opportunities to get selected that not blindly. Positive effect at preliminary round and finals: increased women likelihood to get elected by 11 percent and for women who made it to the final round positive effect of 33%. Conclusions: 50% chance increase if blind Knowledge Hierarchies Knowledge based hierarchy: organization decides who learns what and whom each worker should ask to deal with a problem Communication - workers acquire only the most relevant knowledge and when confronted eith a problem they cannot solve they ask someone else. Production - workers face a cost of learning. Problem a worker confronts is to choose the length of interval of knowledge acquired to maximize expected output. Productive time is being used, the person is giving me an answer means he can't do something else - a cost. Cost: wasted time Assumption in cost: aggregate all the communication losses in the worker who is being asked and consider communication cost even when he doesn't know the answer Assumpt on organization: the size of the org is large enough and everyone in list of a particular worker may be asked if necessary Characteristics of the organization: 1. Specialization - workers specialize in production or transmission of knwoledge about solutions. Only one class specializes in production and others are problem solvers. If problem is frequent u know how to solve because learning costs are low (when spec is full people r either giving answers or working) 2. Non overlapping knowledge - no solution known by 2 different classes 3. Organization by frequency - productions workers learn to solve the most common problems and problem solvers learn the exceptions . The higher up in the list of production workers the problem is the more unusual the problems she is able to solve. Info in the form of solutions to problems always flows in the same direction, from highest to lowest level since this minimizes communication costs. People learn the things they do the most, managers just the exceptions 4. Pyramidal organization: an organization with multiple layers has one layer smaller than the previous one and less people in top layers who are managers and deal w most difficult problems Let's examine an alternative interpretation: organization when problems differ in their difficulty. Suppose that problems differ in their difficulty rather than in their frequency. The same argument as in 1. specialization leads here to an optimal solution with specialization in problem solving. The fewer members this class needs to have in order to answer their questions, since there will be a smaller proportion of problems left to be solved --> proposition 2 and 4. the only one to be change in proposition 3 that will become: 1. Production workers learn to solve the easiest problems and problem solvers learn to solve the harder ones The problem an organization confronts is to allocate to each layer: 1. A measure of workers 2. Division of knowledge 3. A list of layers whom workers in a particular layer I may ask for solution Comparative Statistics: - H is communication costs: if h decreases, we can communicate more, production workers should know less and managers should know more. The span of control is the number of workers that each manager has, if it's easier to communicate with workers then each manager can have more workers. This increases range of expertise of problem solvers and decrease range of expertise of production workers and increase span of control of problem solvers at each level. - C is the cost of acquiring knowledge: if c decreases, there's more training programs, the knowledge of both managers and workers will increase so also span of control. - I is the uncertainty of environment: changes in uncertainty can increase or decrease knowledge and skills of managers, on one side, I don't want want to acquire more skills if I don't know whether I'll be able to use them but also if I increases I want to have more knowledge to face it. We were assuming non overlapping knowledge but there is an extension, overlapping knowledge case. Managers know how to solve frequent and non-frequent problems. Difference: strongly diminishing returns to number of layers, adding another layer is acquiring redundant knowledge. Thus the number of layers at the optimum is always relatively small Implication of the models: 1. Knowledge based hierarchies and management by exception dealing with just difficult problems: managers solve the exception that no one else can deal with. If there are routine problems, then they can solve them otherwise the manager solves them 2. Information technology and organizational design, communication costs and knowledge are important: the impact of h is different from that of c , we r given info on costs of communication 3. Vertical integration, usually more frequent things are done in the house, the rest externally 4. Predictability of production and organizational design 5. Coordination costs limit specialization 6. The market for knowledge: the company tells you how much knowledge is required by one layer, but how we should acquire the skills is ambiguous We have modelled an organization whose aim is to structure the acquisition of knowledge to to economize on learning and communication costs by incorporating the role of hierarchical organization in solving problems encountered in production. Path to follow: assign workers to positions in the hierarchy and obtain equilibrium skill wage functions, design incentive systems to ensure that workers deal with the right problems rather than over or under referring them to other layers Specialization, firms and markets: division of labour btw and within law firms Garicano and Hubbard 2014 US legal services industry. When do firms efficiently govern relationship btw specialists or markets? Objective: is it true that the level of specialization of lawyers depends on the size of the market? There is a positive coefficient, yes. The distinct effects of Information Technology and Communication technology 1. Information technology (IT) a. Spread of cheap storage and processing of data b. Cheaper information - easy access c. Decentralizing or "empowering" force, since you don't have to rely too much on managers 2. Communication technology (CT) a. Spread of cheap wired and wireless communication b. Easier communication c. Centralising force, workers can rely more on managers Objective: test the differential impact of information and communication considering a) knowledge that is horizontal and hierarchical and b)information acquisition costs and communication costs. Theoretical starting point - Garicano 2000 The race between communication and information technology simplified version of Garicano 2000 Assumptions: 1. Production requires time and knowledge 2. Knowledge acquisition can be costly 3. Knowledge can be communication Cheaper communication centralizes, and cheaper information access decentralizes. Using data from EU and US: For plant managers: lower information costs lead to decentralization while lower communication costs lead to centralization which leads to less autonomy. For workers: more communication leads to more centralization, + CAD/CAM technologies: worker empowerment The effect on span of control is that cadcam increases span of control, and intranet decreases it. However the coefficient is negative and insignificant so its still and open empirical question. Automation theories: information technologies are associated with decentralization Coordination theories: communication technologies are associated with centralization Anatomy of French Production Hierarchies - Caliendo et Al 2015 They get data for french firms to evaluate what happens to the hierarchies when there is a change in the demand and there is the possibility that it grows and keeps the same layers or they change it, the main question is how many workers to hire? Layers: group of employees with similar characteristics summarized in their knowledge, who perform similar tasks in the organization Hierarchical organization: higher layers of management are smaller more knowledgeable employees whose subordinates are employees in the lower level Theoretical setting: N identical agents endowed with one unit of time that they supply inelastically , in exchange they receive a wage. The enterpreneur chooses 1. Number of layers 2. Employees at each layer 3. Knowledge each employee acquires subject to output constraint and time constraint of employees at each layer Each entpr produces a variety whose demand depends on the price, aggregate revenue of economy and aggregate price index. The solution of the model is reached when the enterpreneur max profits and minz the cost funcction, and in equilibrium the firms are hierarchical. 2. Coase theorem: if property rights are well defined then the party creating the externality and the receiver party reach a joint solution. However due to the endowment effect the person will value more the clean river and ask for a higher price for the person polluting will value pollution more Prospect theory is a suitable replacement for expected utility because it explains at the economics annomilies as well as the regular phenomena. Intertemporal choices and time inconsistency Time inconsistency is when the optimal decision at one point in time is not the optimal decision in another point in time. Preference reversals due to time changes. What is the explanation of this and the alternative proposed> 1. Preferences are dynamically inconsistent because we do not discount all time periods uniformly (exponential discounting) meaning the discount factors differs among periods 2. We overweight time periods closer to the present Hyperbolic discounts more nearer delays than the exponential model predicts. Further delays are less aversive 1. Gains tend to be discounted more heavily than losses: people are more patient for losses than they are for gains 2. Magnitude effect/amount effect - people tend to be more patient as stakes rise Experimenets show that self imposed deadlines tend to do worse. Heuristics and Biases Heuristics - optimal decision making is hard as such people often rely on rules of thumb. Heuristics approximate a solution with little deliberation cost, but have the potential to make systematic errors. Base rate neglect - follow more into the stereotype being true than the probability Law of small numbers - don’t know how small ones behave because no normal distribution Gambler's fallacy - misperception of chance and randomness even when the sequence is short Illusion of control- the belief that tasks that only depend on chance involve some element of skill Availability heuristic - assess probability by personal experience or instances of occurrence that springs to the head bias due to familiary or salience Status quo bias - doing nothing or maintaining current decision. Possible reasons 1. Transaction costs (if high we don’t change) 2. Inertia or habit 3. Risk aversion 4. Omission/commission bias - rather not do a mistake than make one 5. Rationalisation/cognitive dissonance - prefer not to think abt it if it gives us mixed feelings 6. Bounded rationality Example: more new employees choosing new healthcare plan and old employees sticking to old one Framing bias - peoples' elicited preferences are susceptible to superficial variations in which options are described Behavioural economics explains discrepancies in actions or decisions that standard economic theory cannot explain by incorporating more realistic psychological foundations. It does not imply a wholesale rejection to traditional approach but allows for more precise predicitions and equilibria.
