Illoong Kwon

Endogenous Favoritism in Organizations

This paper shows that favoritism can arise endogenously as an optimal decision rule in a symmetric model with an ex-ante impartial principal. Furthermore, favoritism dominates fairness specifically when the favorite promotes his own idea and ignores the others idea so that the non-favorite loses motivation. Our model also provides new insights on hierarchical communication structure and group authority.

Threat of Dismissal: Incentive or Sorting?

Many people are fired from their jobs for poor performance. However, it is difficult to distinguish whether they are fired because they are not well suited for their job (sorting explanation) or because the firms are trying to provide incentives for effort (incentive explanation). This article develops a dynamic incentive model of dismissal and proposes a methodology to distinguish between these two explanations. The methodology is based on learning‐by‐doing and changes in the slope of dismissal probability with respect to tenure. Using personnel data from a large U.S. company, this study finds significant evidence for the incentive explanation.

R&D Portfolio and Market Structure

This article analyses how firms allocate their resources when they compete for multiple patents in heterogeneous research projects simultaneously. A simple model shows that firms’ resource allocation is biased away from risky and basic research, even when imitation is not possible and firms are fully rational. Therefore a market may lack major innovations despite large aggregate research expenditure and strong patent protection. This article also shows that as a market becomes more competitive, firms invest relatively less in basic research but more in risky research. These results provide a novel explanation for an ambiguous empirical relationship between innovation and market concentration.

Patent Races with Secrecy

Firms do not always patent their innovations. Instead, they often rely on secrecy to appropriate the returns of innovations. This paper endogenizes firms’ patent propensity, and shows that when the equilibrium patent propensity is small, strengthening patent protection can decrease firms’ incentive to innovate. Paradoxically, this result holds precisely when a stronger patent policy induces more patent applications. Also, these results can arise even in the simplest patent race model with independent innovations as well as with complementary innovations.

Status in the Workplace: Evidence from M&A

Using mergers and acquisitions as a natural experiment, this paper analyzes how changes in workers?status in the workplace affect their turnover decisions. The evidence suggests that workers have different preferences for status depending on reference group. When compared with co-workers in the same occupation, workers positively value their status. However, when compared with workers in other occupations in the same firm, workers negatively value their status. Workers seem to give up absolute wage increase for higher status within occupation, which suggests that preference for status stems from status?social value, not from its instrumental value for future income.

DOES TRUST PROMOTE ENTREPRENEURSHIP IN A DEVELOPING COUNTRY

Trust was found to promote entrepreneurship in the US. We investigated whether this was true in a developing country, Indonesia. We failed to replicate this; this failure was true whether trust was estimated at the individual or community level or whether ordinary least squares (OLS) or two stage least squares (2SLS) was employed. We reconciled the difference between our results and those for the US by arguing that the weak enforcement of property rights in developing countries and the consequent hold-up problem make it more efficient for entrepreneurs to produce generic goods than relationship-specific goods—producing generic goods does not depend on trust.

Working for Female Managers: Gender Hierarchy in the Workplace

We study workers’ reactions to changes in the gender composition of top management during a merger or acquisition, finding that an increase in the number of female top managers within their occupation makes male workers more likely to quit, and female workers less likely to quit. These effects vary across occupations, depending on the female share, and male workers’ aversion to female managers is strongest when the female share nears 50 percent. The effects also vary over time and with age, becoming smaller in more recent years and among younger males, but increasing with education level. We find little evidence that these preferences are driven by pecuniary effects.

Risk-taking in subjective promotion tournaments

This article considers a promotion tournament where the winner is decided by the principals posterior belief about the agents’ abilities, called a subjective promotion tournament. If the agents can choose the risk of their performance as well as their effort, this article shows that such a subjective tournament can be better than an objective tournament where the winner is decided by the agents’ verifiable performance measures only. This is because the subjective tournament leads to lower uncertainty about the agents’ abilities and a higher level of agents’ effort, thereby providing better sorting and incentive effects.

Specificity of Human Capital and Promotions

This paper analyzes firms’ hiring and promotion patterns in each job rank within firms, and infers the relative significance of firm- and occupation-specific human capital. The results suggest that firm- and occupation-specific skills are equally valuable for tasks in each job rank, and that the significance of each increases with job rank, but that there exists a large amount of heterogeneity across occupations. This paper also shows that the lengths of firm- and occupation-tenure are very noisy measures of firm- and occupation-specific human capital, and contrasts our results with those from other recent studies on the returns of firm- and occupation-tenure.

Optimal Contracts for Long-Term Decisions and the Threat of Dismissal

This paper studies a simple agency model where an agents decision can affect his or her own future payoffs as well as the principals. The threat of dismissal becomes an important part of an incentive scheme even if the principal can use the performance-based wage contract. However, if the agents future payoffs depend on the past realized performance, but not on the past decision directly, or if the agent is risk-neutral, it is not optimal to use the threat of dismissal. As the agents discretion over his future payoffs increases, the principal relies more on the threat of dismissal but less on the wage contract.