Essays on organizational economics
This dissertation presents an economic (incentive-oriented) analysis of two essential aspects of organizational strategy: the selection of personnel to ensure loyalty (essays one and two) and the use of the best available information to allocate budgets (essay three).
The first essay analyzes loyalty as an agent's choice to bear personal costs to his superior's direct or indirect benefit. In return, the manager may offer various forms of rewards. Typically only repeated interaction can sustain such an exchange. Beyond loyalty, the manager is interested in the employee's competence. This analysis looks at the tradeoff between these two valued qualities when, as seems likely, more competent agents have more attractive outside opportunities. It finds that: (1) even when loyalty is both feasible and net productive, it may not be optimal (i.e., the manager prefers spot contracting), (2) the manager may find it optimal to hire a less competent employee to induce loyalty, but that (3) where there is loyalty, when loyalty becomes more important, the optimal competence level increases. These insights explain several empirical regularities, including evidence presented from family firms and public agencies.
The second essay demonstrates that in this framework (4) loyalty can be a signal of low competence. The analysis also predicts that (5) a meritocracy—more competent individuals receive more discretion—results when the impact of discretion on the value of loyalty is sufficiently strong compared to the impact on the availability of outside options.
The third essay (with Nolan Miller and Richard Zeckhauser) provides a method for an organization's center to allocate resources to units under its control which are better informed. If units value their own expenditures more than those of their peers, they will seek excess budgets and expenditures. The paper shows how budget authorities can infer productivities from units' expenditure patterns across spending categories and over time. Optimal screening budgets reward more productive units with greater overall budgets. Such screening provides significant welfare gains over traditional fixed or reallocable budgets. Empirical results for a large electricity and infrastructure provider support an important version of the model.