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LEARNING OBJECTIVES: Upon completion of the course students should be able
COURSE DESCRIPTION:
Why do monetary incentives work well to induce "good" behavior in one situation, but dramatically fail in another situation? Should workers be paid for their individual performance, or should the performance of a team matter? What role do informal agreements and implicit understandings play in organizations? (Or, put differently, why are organizations more than a nexus of formal contracts?) To what extent does formal authority in an organization translate into effective power, and when is it good to delegate formal authority? What makes firms perform better (or worse) than markets? What determines the hierarchical shape of an organization? How do changes in information technology affect the organizational structure of firms (for example, will hierarchies become steeper or flatter)?
Questions like these are of immense practical importance and have inspired a great body of research in Economics, Management and other disciplines. Organizational Economics cuts across disciplines in terms of questions it asks and brings to these problems the power of economic modeling. With this approach it is often possible to understand driving forces and comparative statics in complex situations where it is hard to apply in a logically consistent way the more qualitative approaches of other disciplines. While the Micro- and Macroeconomics curriculum typically treats firms as monolithic profit maximizing entities endowed with a production function, Organizational Economics attempts to open this "black box".
This course addresses students both with a Management and Economics background. The main purpose is to provide the students with a thorough understanding of the key ideas and modeling tools in Organizational Economics, and to enable students to draw on the scientific literature and methods in the field to analyze problems that organizations face. The course hones analytical skills that are of great use, for example, in preparing business decisions, giving policy advice in the political process and consulting, and it enlarges the toolbox of students who intend to pursue more research oriented careers.
The first part introduces during lectures key topic areas in Organizational Economics and shows how model building blocks can be fruitfully applied to "look under the hood" of organizations and understand what makes them function well (or not so well). The focus is on concepts and methods that will enable to students to work independently with the scientific literature in the field. The second part of the course builds on this to develop some themes
further and more broadly. It will be organized around student presentations and class-room discussion.
COURSE SUBJECT AREAS:
1. Introduction: What is organizational economics?
Coase, Ronald H., 1937, The nature of the firm, Economica 4, 386-405.
Hayek, Friedrich A., 1945, The use of knowledge in society, American Economic Review 35, 519-530.
2. Contracts, risk-sharing and incentives
Cahuc, Pierre, and André Zylberberg, 2004, Labor Economics (MIT Press: Cambridge, MA). [Chapter 6, p. 305-333]
3. Incomplete contracts and the boundaries of the firm
Baker, George P., and Thomas N. Hubbard, 2004, Contractibility and asset ownership: On-board computers and governance in U. S. trucking, Quarterly Journal of Economics 119, 1443-1479.
Hart, Oliver, 1995, Firms, Contracts, and Financial Structure (Clarendon Press: Oxford). [Chapters 1 & 2, p.15-55],
4. Relational contracts
Baker, George, Robert Gibbons, and Kevin J. Murphy, 2002, Relational contracts and the theory of the firm, Quarterly Journal of Economics 117, 39-84.
5. Authority and communication
Aghion, Philippe, and Jean Tirole, 1997, Formal and real authority in organizations, Journal of Political Econom y 105, 1-29.
6. Hierarchies
Garicano, Luis, 2000, Hierarchies and the organization of knowledge in production, Journal of Political Economy 108, 874-904.
Garicano, Luis, and Tom Hubbard, 2008, The return to knowledge hierarchies, Working Paper Chicago GSB
http://faculty.chicagogsb.edu/luis.garicano/research/index_files/rethierarchy.pdf .
7. Topics in organizational economics based on student assignments
A detailed list of further readings will be provided at the start of the course.
REQUIRED COURSES (progression): BSc.oecon. or similar.
There are no specific, formal requirements in terms of courses that must have been passed to take this course. However, the lectures at the beginning, as well as the selection of topics for student assignments and presentations will assume a certain familiarity with asymmetric information problems, agency models, transactions cost theories and performance pay, as well as with basic microeconomic models of monopoly pricing, price discrimination and imperfect competition.
Organizational Economics is intended to be an optional, advanced-level M.Sc. course tailored to students in both Management and Economics, who are either considering dissertation work in the general areas of Theory of the Firm, Theory of Organizations, Human Resource Management and Corporate Governance, or who are seeking advanced-level activities applying methodologies developed in other courses. As such, it takes its point of departure methodologies developed in core courses in the Management sequence such as Theories of the Firm, Corporate Finance and Accounting for Decision and Control, as well as core courses in the Economics sequence such as Micro 1. The course is also open to PhD students.
LECTURER: Alexander Koch
TEACHING METHOD: There will be 4 lectures a week for about 6 weeks. When the lectures are over, the students will (preferably in groups of 2 - 3) work on an assignment with a view to producing a written report. The assignment will depart from material covered in the lectures, and the report is limited to 15 pages per student.
In the beginning of the semester there will be a series of lectures. These provide an overview of the various topics under the general headline of Organizational Economics. The lectures also go into some methodological issues, which may be unfamiliar to most students at the outset. The aim is to enable students to read and understand recent journal articles. These skills will then be applied in the second part. In this phase, meetings will be organized around student presentations and class-room discussion. Based on their project assignment, students will give short presentations to fellow students followed by a classroom discussion. The final exam will be oral, based in part on the project reports and in part on a common reading list.
TEACHING LANGUAGE: English
LITERATURE:
The required readings for the lecture part of the course (see above) are around 300 pages (Note: There may still be a few changes in the reading schedule). Students will depart from this common reading list in their individual projects. For this purpose they will be given a list of additional readings to use as starting points when researching their projects.
FORM OF ASSESSMENT: Oral exam without preparation based partly on project report (30 mins.). In the final grading, the weight of the oral exam is ½ and the weight of the project report is ½.
EXAMINATION AIDS ALLOWED: Only the project report
