Essays in Organizational Economics

The first chapter examines the interaction of heterogeneous firms in a competitive market in which firms motivate their workers using relational incentive contracts. In the steady-state rationalexpectations equilibrium, aggregate TFP is fully characterized by a weighted average of firm-specific sustainable effort levels. Relational contracts amplify exogenous productivity heterogeneity and lead to dispersion in the net marginal revenue product of labor. Improvements in formal contracting disproportionately benefits low-productivity firms, leading to a greater dispersion of the net marginal revenue product of labor in weaker contracting environments. Thus, cross-country differences in contracting institutions can partially explain the observed pattern that misallocation is more pronounced in developing countries. The second chapter explores organizational responses to influence activities-costly activities aimed at persuading a decision maker. Rigid organizational practices that might otherwise seem inefficient can optimally arise. If more complex decisions are more susceptible to influence activities, optimal selection may partially account for the observed correlation between the quality of management practices and firm performance reported in Bloom and Van Reenen (2007). Further, the boundaries of the firm can be shaped by the potential for influence activities, providing a theory of the firm based on ex-post inefficiencies. Finally, boundaries and bureaucratic institutions interact: more concentrated decision-making and bureaucratic institutions are complements. The third chapter (co-authored with Robert Gibbons and Richard Holden) analyzes a rationalexpectations model of price formation in an intermediate-good market under uncertainty. There is a continuum of firms, each consisting of a party who can reduce production cost and a party who can discover information about demand. Both parties can make specific investments at private cost, and there is a machine that either party can control. As in incomplete-contracting models, different control structures create different incentives for the parties' investments. As in rationalexpectations models, some parties may invest in acquiring information, which is then incorporated into the market-clearing price of the intermediate good by these parties' production decisions. The informativeness of the price mechanism affects the returns to specific investments and hence the optimal control structure for individual firms; meanwhile, the control structure choices by individual firms affect the informativeness of the price mechanism. In equilibrium the informativeness of the price mechanism can induce ex ante homogeneous firms to choose heterogeneous control structures. Thesis Supervisor: Robert S. Gibbons Title: Sloan Distinguished Professor of Management Professor of Organizational Economics