Abhijit Ramalingam

The Firm as a Socialization Device

Why do firms exist? What is their function? What do managers do? What is the role, if any, of social motivation in the market? In this paper, we address these questions with a new theory of the firm, which unites some major themes in management, principal-agent theory, and economic sociology. We show that although the market is a superior incentive mechanism, the firm has a comparative advantage with respect to social motivation. We then show that the market is efficient in environments that favor the provision of incentives, such as when subjective risk is low and performance is easy to measure. The firm is efficient in other environments where incentives are costly and/or ineffective. We compare our model and results with the views of Durkheim (Durkheim, E. 1984. The Division of Labor in Society. Free Press, New York) and Granovetter (Granovetter, M. 1985. Economic action and social structure: The problem of embeddedness. Amer. J. Sociol. 91(3) 481--510).

Property rights and loss aversion in contests

We analyze the effects of property rights and the resulting loss aversion on contest outcomes. We study three treatments: in ‘gain’ two players start with no prize and make sunk bids to win a prize; whereas in ‘loss’ both the subjects start with prizes and whoever loses the contest loses their prize. Finally, in ‘mixed’ one player starts with a prize, which stays with him if he wins but is transferred to the rival otherwise. Since the differences among the treatments arise only from framing, the expected utility or the standard loss aversion models predict no difference in bids across treatments. We introduce a new model with loss aversion in which the property rights are made salient. This model predicts average bids in descending order in the loss, the mixed, and the gain treatment; and higher bids by the player with property rights in the mixed treatment. The results from a laboratory experiment broadly support these predictions. In the laboratory, no significant difference is found in bids in the loss (gain) treatment versus bids by property rights holder (non-holder) in the mixed treatment. A model incorporating both loss aversion and social preference explains this result.

Authority and centrality: Power and cooperation in social dilemma networks

We investigate the effects of power on cooperation in repeated social dilemma settings. Groups of five players play either multi-player trust games or VCM-games on a fixed network. Power stems from having the authority to allocate funds raised through voluntary contributions by all members and/or from having a pivotal position in the network (centrality). We compare environments with and without ostracism by allowing players in some treatments to exclude others from further participation in the network. Our results show that power matters but that its effects hinge strongly on the type involved. Reminiscent of the literature on leadership, players with authority often act more cooperatively than those without such power. Nevertheless, when possible, they are quickly ostracized from the group. Thus, this kind of power is not tolerated by the powerless. In stark contrast, centrality leads to less cooperative behavior and this free riding is not punished; conditional on cooperativeness, players with power from centrality are less likely to be ostracized than those without. Hence, not only is this type of power tolerated, but so is the free riding it leads to.

Inequality and Competitive Effort: The Roles of Asymmetric Resources, Opportunity and Outcomes

We investigate how individuals react to different types of asymmetries in experimental two-player Tullock contests where contestants expend resources to win a prize. We study three different sources of asymmetry: abilities, resources and possible outcomes. We find that overall competitive effort is greater in the presence of asymmetric abilities than other inequalities. Unlike other forms, asymmetry in abilities elicits a very aggressive reaction from disadvantaged players relative to their advantaged opponents. The Quantal Response Equilibrium (QRE) suggests that financial incentives are less salient in the presence of a biased contest procedure. Moreover, despite similar average efforts, contestants with an advantage in ability mostly play a ‘safe’ strategy that secures a higher likelihood of winning the contest, while other advantaged players strategically adapt their efforts to those of their opponents.

The Firm as an Intrinsic Motivation Device

In this paper, we develop a new theory of the firm where the market is primarily an incentive system whereas the firm is an intrinsic motivation device. The firm is more efficient than the market when asset specificity and subjective risk are sufficiently high because it provides balanced incentives, fosters intrinsic motivation, and economizes on risk. An efficient firm is unambiguously the more ethical institution in the sense that the component of production effort due to intrinsic motivation and the agents rents in exchange for commitment are higher. The exception is when the market approximates the first best.