Andrew F. Newman

Monotone Matching in Perfect and Imperfect Worlds

We study frictionless matching in large economies with and without market imperfections, providing sufficient conditions for monotone matching that are weaker than those previously known. Necessary conditions, which depend on a key analytical object we call the surplus function, are also offered. Changes in the surplus yield valuable information about the comparative statics of matching patterns across environments. We apply our framework to some examples adapted from the literature, accounting for and extending several comparative-static and welfare results. We also explore the dependence of the matching pattern on the type distribution.

Competing for ownership

We develop a tractable model of the allocation of control in firms in competitive markets, which permits us to study how changes in the scarcity of assets, skills or liquidity in the market translate into control inside the organization. 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. The model identifies a price-like mechanism whereby local liquidity or productivity shocks propagate and lead to widespread organizational restructuring.

The Labor Market and Corporate Structure

This paper analyses the impact of labour demand and labour market regulations on the corporate structure of fims. It finds that higher wages are associated with lower monitoring, irrespective of whether these high wages are caused by labour market regulations, unions or higher labour demand. These comparative static results are in line with the broad trends in the data. The paper also finds that the organization of firms has important macroeconomic implications. In particular, monitoring is a type of ‘rent-seeking’ activity and the decentralized equilibrium spends excessive resources on monitoring. Labour market regulations that reduce monitoring by pushing wages up may increase net output or reduce it only by a small amount even though they reduce employment.

Risk-bearing and entrepreneurship

In the “Knightian” theory of entrepreneurship, entrepreneurs provide insurance to workers by paying fixed wages and bear all the risk of production. This paper endogenizes entrepreneurial risk by allowing for optimal insurance contracts as well as the occupational selfselection. Moral hazard prevents full insurance; increases in an agent’s wealth then entail increases in risk borne. Thus, even under decreasing risk aversion, there are robust instances in which workers are wealthier than entrepreneurs. This empirically implausible result suggests that risk-based explanations for entrepreneurship are inadequate.

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.

Smithian growth through creative organization

We model technological progress as an external effect of organizational design, focusing on how factories, based on labor division, could spawn the Industrial Revolution. Dividing labor, as Adam Smith argued, facilitates invention by observers of production processes. However, entrepreneurs cannot internalize this benefit and choose labor division to facilitate monitoring. Equilibrium with few entrepreneurs features low wage shares, and high specialization, but a limited market for innovations. Conversely, with many entrepreneurs, there is a large market for innovation but little specialization because of high wage shares. Technological progress therefore occurs with a moderate scarcity of entrepreneurs. Institutional improvements affect growth ambiguously.

Incomplete Contracts and Industrial Organization: A Survey

While most researchers in industrial organization agree that the neoclassical, cost-minimizing, unitary, view of the firm is restrictive, it is still the main object of anlysis in the literature. We review the literature in industrial organization and the place occupied by a richer view of the firm both before and after Grossman & Hart (1986) (GH). Before GH, integration was viewed as a way to alleviate hold-up problems, agency or market power distorsions; GH pointed out that integration and ownership reallocation create their own incentive problems. We show how this insight can enrich the usual analysis of firms with market power but also opens the door for a rich set of questions in more competitive environments.

Migration, Integration, and Development

We re-examine the Lewis undermigration hypothesis by studying a two-sector model in which there is a trade-off between higher productivity in the modern sector and better information in the traditional sector. The consequent presence of well-functioning local insurance markets in the traditional sector and their absence in the modern sector leads to the possibility of inefficient undermigration: total social surplus would be increased if migration were larger than its laissezfaire level; whether this occurs depends in part on the distribution of wealth. In a dynamic version of the model, modernization of the economy may be too slow, and it is possible that the economy gets stuck in an undermigration trap (never fully modernizes). The migratory dynamics also lead to wellrdefined dynamic relations between average income and inequality. We find that although the Kuznets inverted-U curve may arise, it is equally likely that the relation of inequality and income follows other patterns, including an upright U. *We are grateful for comments from Tim Besley, Shubham Chaudhuri, Raquel Fernandez, Ron Findlay, Thomas Piketty, and Nouriel Roubini, and to seminar participants at M.I.T., N.Y.U., Princeton, Columbia, Cornell, Madrid (Carlos III). The second author thanks the Institute for Policy Reform for financial support. tDepartment of Economics, Massachusetts Institute of Technology, Cambridge, MA 02139 * Department of Economics, Columbia University, New York, NY 10027

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 — a generalization of the individually rational 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.

Come Together: Firm Boundaries and Delegation

Little is known theoretically, and even less empirically, about the relationship between firm boundaries and the allocation of decision rights within firms. We develop a model in which firms choose which suppliers to integrate and whether to delegate decisions to integrated suppliers. We test the predictions of the model using a novel dataset that combines measures of vertical integration and delegation for a large set of firms from many countries and industries. In line with the model’s predictions, we obtain three main results: (i) integration and delegation co-vary positively; (ii) producers are more likely to integrate suppliers in input sectors with greater productivity variation (as the option value of integration is greater); and (iii) producers are more likely to integrate suppliers of more important inputs and to delegate decisions to them.