Economics 286W
Honors Seminar
Spring 2004
Wednesdays, 2-4
Koons Hall 311
R. N. Langlois
322 Monteith X63472
Office hours MW 9-12 and 1-2 or by appointment
Assignment 4
Our next talk takes us back to the topic of the first assignment: the economics of organization.
In the 1970s, the theory of the firm initiated by Coase finally began to gain the attention of economists. At the same time, the tenor of that theory moved away from the kinds of transaction costs Coase had described – which were largely costs of search and coordination – toward a concern with the role of motivation in economic organization. An influential (and quite readable) paper by Armen Alchian and Harold Demsetz pointed to the costs of monitoring workers as an explanation for firms. Since then, issues of shirking, monitoring, and “opportunistic” behavior have come to dominate theoretical accounts. At the same time, however, economists who have looked at the actual role that incentives play within organizations have discovered a complex picture. In real-world organizations, incentives (at least narrowly pecuniary incentives) seem to matter less than theory suggests they ought to. There are two possibilities: either (a) the theory of incentives will eventually figure out how to include these seemingly anomalous results within the framework of rational optimizing behavior (that is, within a framework that assumes that people are motivated by an attempt to make themselves better off given their knowledge and constraints) or (b) we should abandon that theory in favor of one that admits of nonpecuniary – or maybe even “noneconomic” – motivations. In a 1988 survey paper, Baker, Jensen, and Murphy take the first approach. Although spending much of their time discussing the ways in which actual incentive schemes fail to fit the theory, they hold out hope that the theory will eventually catch up with reality. By contrast, our speaker, Lanse Minkler, uses survey data to argue that people are motivated in ways not captured by the assumptions of standard theory.
Your assignment is this: read Alchian and Demsetz, and then consider the arguments in the paper by Baker, Jensen, and Murphy and the paper by Minkler. Do we need to assume “noneconomic” motivations in order to explain the behavior of workers (and the organization of firms)? And, if so, in exactly what sense is the behavior we need to assume “noneconomic”?
Note: I have placed on WebCT a newer version of the Minkler paper than the one linked above.
Due: March 31.
