Competitive Prices and Organizational Choices

We construct a price-theoretic model of integration decisions and show that these choices may adversely affect consumers, even in the absence of monopoly power in supply and product markets. Integration is costly to implement but is effective at coordinating production decisions. The price of output helps to determine the organizational form chosen: there is an inverted-U relation between the degree of integration and product prices. Moreover, organizational choices affect output: integration is more productive than non-integration at low prices, and less productive at high prices. Since shocks to industries affect product prices, reorganizations are likely to take place in coordinated fashion and be industry specific, consistent with the evidence. Since the price range in which integration maximizes productivity generally differs from the one in which it maximizes managerial welfare, organizational choices will often be second-best inefficient. We show that there are instances in which entry of low-cost suppliers can hurt consumers by changing the terms of trade in the supplier market, thereby inducing reorganizations that raise prices.

Managerial Firms, Vertical Integration, and Consumer Welfare

We show that vertical integration decisions of managers may affect adversely consumers even in the absence of monopoly power in either supply or product markets. This effect is most likely to come about when demand is initially high and there is a negative supply shock or when demand is low and there is a positive demand shock. The results are robust to the introduction of active shareholders and to other extensions.

Competing for Ownership

We develop a tractable model of the allocation of ownership and control in firms in competitive markets that permits study of how the scarcity of assets in the market translates into control allocations inside the organization. The model identifies a price-like mechanism whereby local liquidity or productivity shocks propagate and lead to widespread organizational restructuring. Firms will be more integrated when the terms of trade are more favorable to the short side of the market, when liquidity is unequally distributed among existing firms and following a uniform increase in productivity. Shocks to the first two moments of the liquidity distribution have multiplier effects on the corresponding moments of the distribution of ownership.

Trade Liberalization and Organizational Choice

We embed a simple incomplete-contracts model of organization design in a standard two-country, perfectly-competitive trade model to examine how the liberalization of product and factor markets affects the ownership structure of firms. In our model, managers decide whether or not to integrate their firms, trading off the pecuniary benefits of coordinating production decisions with the private benefits of operating in their preferred ways. The price of output is a crucial determinant of this choice, since it affects the size of the pecuniary benefits. In particular, non-integration is chosen at "low" and "high" prices, while integration occurs only at moderate prices. Organizational choices also depend on the terms of trade in supplier markets, which affect the division of surplus between managers. We obtain three main results. First, joint product and factor market integration leads to the convergence of organization design across countries. Second, even in the absence of factor movements, the price changes triggered by liberalization of product markets can lead to significant organizational restructuring within countries. Third, the removal of barriers to factor mobility can induce further organizational changes, sometimes adversely affecting consumers, which suggests a potential complementarity between trade policy and corporate governance policy.

Are Career Women Good for Marriage?

We study US divorce rates, which despite the continuing rise in female labor force participation (FLFP), have been falling since the mid-1980s, reversing a two-decade trend. A cross section of U.S. states for the year 2000 displays a negative relationship between the divorce rate and FLFP. We present theory and evidence in support of the view that these recent trends are the product of two distinct economic forces: relative to their non-career counterparts, career women display greater selectivity in the search for marriage partners and greater flexibility in sharing the benefits of a marriage with their partners. Greater selectivity implies that career women will be older when they first marry and that their marriages will be of higher average “quality,†possibly making them less prone to breakup. Greater flexibility implies that it is easier for two-earner families to re-adjust the intrahousehold allocation to compensate for changes in outside opportunities, making marriages more resistant to “shocks.†Our evidence shows that both effects may be playing a role in generating the trends the trends.

Trade Liberalization and Organizational Change

We embed a simple incomplete-contracts model of organization design in a standard two-country perfectly-competitive trade model to examine how the liberalization of product and factor markets affects the ownership structure of firms. In our model, managers decide whether or not to integrate their firms, trading off the pecuniary benefits of coordinating production decisions with the private benefits of operating in their preferred ways. The price of output is a crucial determinant of this choice, since it affects the size of the pecuniary benefits. In particular, non-integration is chosen at “low” and “high” prices, while integration occurs at moderate prices. Organizational choices also depend on the terms of trade in supplier markets, which affect the division of surplus between managers. We obtain three main results. First, even when firms do not relocate across countries, the price changes triggered by liberalization of product markets can lead to significant organizational restructuring within countries. Second, the removal of barriers to factor mobility can lead to inefficient reorganization and adversely affect consumers. Third, “deep integration” the liberalization of both product and factor markets ­ leads to the convergence of organizational design across countries.Firms, Contracts, Globalization

Wealth Effects, Distribution and the Theory of Organization

We construct a general equilibrium model of firm formation in which organization is endogenous. Firms are coalitions of agents providing effort and investment capital. Effort is unobservable unless a fixed monitoring cost is paid, and borrowing is subject to a costly state verification problem. Because incentives vary with an agents wealth, different types of agents become attractive firm members under different circumstances. When borrowing is not costly, firms essentially consist of one type of agent and are organized efficiently. But when the costly state verification problem is sufficiently severe, firm organization will depend on the distribution of wealth: with enough inequality, it will tend to be dictated by incentives of rich agents to earn high returns to wealth, even if the chosen organizational form is not a technically efficient way to provide incentives

Matching in Perfect and Imperfect Worlds

We study frictionless matching models in large production economies. We provide necessary and sufficient conditions for segregation and for positive assortative matching. These conditions focus on the relationship between what we call the segregation payoff- and the feasible set for a pair of types. Our approach is useful for clarifying differences in the behavior of models in the literature. it also provides a basis for understanding the effects of changes in technology or in the severity of market imperfections on equilibrium welfare and matching patterns

Monotone Matching in Perfect and Imperfect Worlds

We study frictionless matching models in large production economies with and without market imperfections and/or incentive problems. We provide necessary and sufficient distribution-free conditions for monotone matching which depend on the relationship between what we call the segregation payoff -- a generalization of the individually rational payoff -- and the feasible set for a pair of types. Our approach yields some new techniques for computing equilibria, particularly when utility is not transferable. It also helps to underscore the effects of imperfections, which have two distinct effects that are relevant for equilibrium matching patterns: they can overwhelm the complementarity properties of the production technology and they can introduce nontransferabilities that make equilibrium matching inefficient. We also use our framework to reveal the source of differences in the comparative static properties of some models in the literature and to explore the effects of distribution on the equilibrium matching pattern

Prohibitions on Punishments in Private Contracts

In most contemporary economies loan contracts that mandate exclusionary penalties such as imprisonment or other non-pecuniary punishments for defaulting debtors are illegal, despite the fact that in some cases contracting parties might gain by being able to use them. A possible rationale for contracting restrictions of this type is that exclusion imposes negative externalities on individuals not party to the original loan contract. We explore the ability of such externalities to account for these restrictions. We contrast exclusion with enforceable collateral seizure, a widespread feature of developed financial systems. We also consider “behavioral” agents who underestimate their chances of being punished, and show that overconfidence of this type is a less compelling justification for restrictions on exclusionary punishments than is often argued