Auction Theory

This paper discusses two central questions: Why do auction institutions continue to be so popular after thousands of years? and What accounts for particular details, like the popularity of sealed bid and ascending-bid auctions

Quasirents, Influence and Organization Form

When changing jobs is costly, efficient employment arrangements are characterized by complex contracts, rather than simply wages. Under these contracts, workers are not generally fully compensated for the effects of post-employment events or decisions. As a consequence, if there is a central office executive with discretionary authority to make decisions, employees will be led to waste valuable time in attempts to influence his decisions. Efficient organization design balances these “influence costs” against the benefits of improved appraisal, coordination, and planning that such an executive can provide. Identifying influence costs requires first identifying the kinds of decisions about which employees will care. We identify several: with efficient employment contracts, employees prefer more on-the-job consumption and better opportunities to learn and display their abilities and to acquire human capital. They also prefer to occupy jobs where continuity of employment is particularly important to the employer, because such jobs carry higher wages. Applications of our perspective, which focuses on influence processes and the trade-off between influence costs and improved decisionmaking appears to have wide and fruitful application to questions or organization theory, industrial organization, contract theory, and related areas

A Theory of Hierarchies Based on Limited Managerial Attention

Our purpose in this paper is to investigate the economics of managerial organizations by focusing on the decision problem of management. Ours is a “team theory” analysis, that is, it ignores the problem of conflicting objectives among managers and focuses instead on the problem of coordinating the decisions of several imperfectly informed actors. However, unlike classical team theory, we concentrate on the choice by managers of what to know, as well as what to do, and we allow the possibility that bounded rationality limits the managers’ ability to understand subtle messages

Job Discrimination, Market Forces and the Invisibility Hypothesis

The Invisibility Hypothesis holds that the job skills of disadvantaged workers are not easily discovered by potential new employers, but that promotion enhances visibility and alleviates this problem. Then, at a competitive labor market equilibrium, firms profit by hiding talented disadvantaged workers in low level jobs. Consequently, those workers are paid less on average and promoted less often than others with the same education and ability. As a result of the inefficient and discriminatory wage and promotion policies, disadvantaged workers experience lower returns to investments in human capital than other workers

Aggregation and Linearity in the Provision of Intertemporal Incentives

One of the main findings of the principal-agent literature has been that incentive schemes should be sensitive to all information that bears on the agent’s actions. As a manifestation of this principle, incentive schemes tend to take quite complex (non-linear) forms. In contrast, real world schemes are often based on aggregate information with a rather simple structure. This paper considers the optimality of linear schemes that use only aggregated information. The hypothesis is that linear schemes are to be expected in situations where the agent has a rich set of actions to choose from, because richness in action choice allows the agent to circumvent highly nonlinear schemes. We show that optimal compensation schemes are indeed linear functions of appropriate accounting aggregates in a multi-period model where the agent can observe and respond to his own performance over time. Furthermore, when profits evolve according to a controlled Brownian motion (with the agent at the controls) the optimal compensation scheme is linear in profits. The optimal scheme can be computer as if the principal could only choose among linear rules in a corresponding static problem. Applications of this ad hoc principle appear quite promising and are briefly illustrated

Relying on the Information of Interested Parties

We investigate the conventional wisdom that competition among interested parties attempting to influence a decision maker by providing verifiable information brings out all the relevant information. We find that, if the decision maker is strategically sophisticated and well informed about the relevant variables and about the preferences of the interested party or parties, competition may be unnecessary; while if the decision maker is unsophisticated or not well informed, competition is not generally sufficient. However, if the interested parties’ interests are sufficiently opposed, or if the decision maker is seeking to advance the parties’ decision maker’s need for prior knowledge about the relevant variables and for strategic sophistication. In other settings, only the combination of competition among information providers and a sophisticated skepticism is sufficient to allow defective decision making

Job Discrimination, Market Forces and the Invisibility Hypothesis

The Invisibility Hypothesis holds that the job skills of disadvantaged workers are not easily observed by potential new employers, but that promotion enhances visibility and alleviates this problem. Then, at a competitive labor market equilibrium, disadvantaged workers will be paid less on average and promoted less often than other workers with the same education and ability, even if their employers are unprejudiced and know their workers’ abilities. As a result of the discriminatory wage and promotion policies, disadvantaged workers will experience lower returns to investments in human capital than other workers. An affirmative action program that eliminates discrimination and brings about efficiency initially forces the promotion of unqualified workers

Price and Advertising Signals of Product Quality

We present a signalling model, based on ideas of Phillip Nelson, in which both the introductory price and the level of directly “uninformative” advertising or other dissipative marketing expenditures are choice variables and may be used as signals for the initially unobservable quality of a newly introduced experience good. Repeat purchases play a crucial role in our model

Organizing Production in a Large Economy with Costly Communication

We show that in a large production economy, the cost of collecting the information required by a planner to set nearly optimal prices is negligible relative to the total output of the economy. The cost of collecting the information required to set a nearly optimal production plan for each firm in the economy is not negligible. This conclusion stands in contrast to common opinion that determining optimal prices requires as much information as determining an optimal plan