Jan Zabojnik

Trust, Social Capital and Economic Development

Many argue that elements of a society s norms, culture or social capital are central to understanding its development.However, these notions have been difficult to capture in economic models.Here we argue that trustworthiness is the economically relevant component of a society s culture and hence comprises its social capital.Individuals are trustworthy when they perform actions they have promised, even if these do not maximize their payoffs.The usual focus on incentive structures in motivating behaviour plays no role here.Instead, we emphasize more deep-seated modes of behaviour and consider that trustworthy agents are socialized to act as they do.To model this socialization, we borrow from a relatively new process of preference evolution pioneered by Bisin and Verdier (2001).The model developed endogenously accounts for social capital and explores its role in the process of economic development.It captures in a simple, formal way the interaction between social capital and the economy s productive process.The results obtained caution against rapid reform, provide an explanation for why late developing countries cannot easily transplant the modes of production that have proved useful in the West, and suggest an explanation for the pattern of reform experiences in ex-communist countries.

Centralized and Decentralized Decision-Making in Organizations

This article identifies a new type of cost associated with centralization. If workers are liquidity constrained, it may be less costly to motivate a worker who is allowed to work on his own idea than a worker who is forced to follow the manager’s idea. Thus, it may be optimal to let workers decide on the method for doing their job even if managers have better information. This conclusion holds even if more general contracts are considered that are based on communication of information between the worker and the manager, as long as these general contracts are not entirely costless.

Pay-performance sensitivity and production uncertainty

Abstract The pay-performance sensitivity of linear incentive contracts can increase with increasing production uncertainty, depending upon the timing and nature of this uncertainty. This provides a possible explanation for the failure of empirical tests to yield convincing support for a negative relationship.

A model of rational bias in self-assessments*

A body of empirical work documents that most people believe they are above average in a variety of skills and abilities. This paper argues that such evidence does not necessarily imply that people process information in an irrational way. I build a model in which people can learn about their abilities at a cost of foregone production. Individuals in this model keep testing their abilities until their self-assessments become favorable enough, at which point they stop. This way, a disproportionately large share of the population ends up with a high opinion about their abilities.

Internal competition for corporate resources and incentives in teams

Invoking the free-rider problem in teams, many observers find profit sharing in large organizations puzzling, because it should have negligible incentive effects. We show that if a firm can be decomposed into two separate teams whose outputs can be observed, then profit sharing combined with competition between these two teams for internal resources frequently solves the free-rider problem. Using this result, we endogenize the firms organizational structure and show that in the presence of economies of scale, small firms tend to organize as unitary firms, while large firms choose the multidivisional organizational form.

Disobedience and Authority

This paper presents a theory of the allocation of authority in an organization in which centralization is limited by the agents ability to disobey the principal. We show that workers are given more authority when they are costly to replace or do not mind looking for another job, even if they have no better information than the principal. The allocation of authority thus depends on external market conditions as well as the information and agency problems emphasized in the literature. Evidence from a national survey of organizations shows that worker autonomy is related to separation costs as the theory predicts.

Merger, Ease of Entry and Entry Deterrence in a Dynamic Model

We analyze whether ease and speed of entry can mitigate the anti-competititve effects of a merger, in a dynamic model of endogenous merger. In our model, if new firms can enter quickly, it is more likely that merger is motivated by efficiency as opposed to increased market power. Thus, there is less reason to challenge the merger. On the other hand, if entry of new firms becomes less costly, firms may have a stronger incentive to monopolize the industry through horizontal merger. We also show that when the incumbent can engage in entry deterrence activities, anti-merger policy can decrease welfare.

A Rent Extraction View of Employee Discounts and Benefits

We examine how firms can use employee discounts and perks to extract information rents from employees who have private information about their preferences and outside opportunities. The firm creates different bundles of the perk and salary in response to different employee characteristics and marginal costs of the perk. Strategic bundling can lead firms to provide perks even without a cost advantage over the outside market and to deviate from the marginal cost pricing. We characterize how optimal perk provision depends on the set of feasible contracts, on the perks marginal cost, and on the perks price in the outside market. (c) 2008 by The University of Chicago.

Profit Centers and Incentives in Teams

Standard models of team production imply that, due to the free rider problem, profit sharing tends to have negligible incentive effects in large organizations. Many observers therefore find the use of profit sharing in large firms puzzling. In this paper we show that if a firm can be decomposed into two separate teams whose outputs can be observed, then a tournament between these two teams sometimes solves the free rider problem. Moreover, we show that the relationship between production risk and the strength of incentives in an optimal tournament contract can be positive, contrary to the standard conclusion that optimal contracts should exhibit a trade-off between risk and uncertainty. We use our efficiency results to endogenize the firms organizational structure. In particular, we show that in the presence of economies of scale, small firms tend to be organized as unitary firms, while large firms will tend to choose the multidivisional organizational form.

On the efficiency of markets for managers

Summary. This paper examines the efficiency of the outside labor market in inducing optimal managerial behavior in the presence of learning. It shows that the incentives provided by the market can be more efficient than the original analysis of Holmström [6] would suggest. Moreover, under a mild additional assumption, the existence of an