David C. Rose

Marginal productivity analysis in teams

Abstract Alchian and Demsetz [Am. Econom. Rev. 62 (1972), p. 77] argued that when output is produced by a team, the cost of ascertaining marginal products may be so high that the payment of marginal product will be approximated by metering input effort. This paper shows that the payment of marginal product in a team setting was really never an open question and clarifies an important distinction between the practical difficulties associated with ascertaining marginal products in a team setting from the fundamental impossibility of doing so for inputs between whom a team synergy emerges. The implications this distinction has for theory and empirical work is then discussed.

Bankruptcy risk, firm-specific managerial human capital, and diversification

This paper proposes a model in which firm diversification acts as an efficient form of nonpecuniary compensation for the manager. In the model diversification rewards the manager by reducing the likelihood of bankruptcy which in turn increases the expected value of his firm-specific human capital. Unlike the principal-agent model of diversification, this model shows that diversification may be optimal even if the manager is risk neutral and his behavior can be observed by firm owners.

Why Continuous Improvement Is a Poor Substitute for School Choice.

ABSTRACT Efforts to introduce school choice have produced pressures on public schools to improve their performance. As a result, many public schools have embraced the total quality management principle of continuous improvement. In this article we explain that while this may be well intentioned, it may have perverse unintended consequences. A likely by-product of adopting this principle is the degradation of school performance because of an asymmetry of incentives that leads to a systematic bias in the evaluation of the efficacy of new innovations. In short, there is pressure to avoid or abandon innovations that educators oppose even if such innovations improve academic performance, while there is pressure to adopt or continue innovations that educators favor even if they do not improve performance. Anecdotal evidence is presented that is consistent with the argument.

Do Firms Diversify Because Managers Shirk? A Reinterpretation of the Principal-Agent Model of Diversification

In the principal-agent model of firm structure proposed by Aron (1988), diversification is optimal because it reduces managerial risk exposure. Diversification has this effect because it improves the monitoring function of output-contingent compensation which exists to alleviate the managerial moral hazard problem facing the firms owners. But what if managers never shirk or can be easily observed by firm owners so the moral hazard problem vanishes? Does the optimality of diversification vanish as well? This paper develops a self-selection variant of Arons model to show that the answer to this question is no. A by-product of this exercise is that it suggests how one might craft a test of whether the principal-agent model of diversification is driven by the problem of managerial moral hazard or managerial self-selection.

Federal student financial aid awards as subsidies for higher education: What kinds of institutions are we supporting?

This paper attempts to shed light on the following question: What kinds of four-year institutions of higher learning benefit the most from federal student financial aid programs? We address this question by investigating how institutional quality, institutional mission, and the students average net cost of attendance covary with average Pell grant, SEOG grant, GSL loan, and college work-study financial aid awards. Our sample is comprised of 254 nonproprietary four-year public institutions of higher learning and 499 nonproprietary four-year private institutions of higher learning.