Course Instructors: Erik Brynjolfsson , (617) 253-4319, ebrynjo@mit.edu and Jim Rebitzer E52-567, jrebitze@sloan.mit.edu
Teaching Assistant: Marshall Van Alstyne, (617) 253-2970, marshall@mit.edu
Secretary: TBA
Class Time & Place: Fridays, 2:30-5:30 MIT Room E51-310
Office Hours: By appointment
(2) Course Packet from Graphic Arts, E52-045.
(3) Supplemental handouts will be distributed in class.
Class participation 33%8, two page papers on readings 33%
One Survey or Research Paper 33%
Identifying a new article or seminar 1%
Business organizations use a bewildering variety of structures to coordinate the productive activities of their stakeholders. Dramatic changes in information technology and the nature of economic competition are forcing firms to come up with new ways of organizing work. This course uses economic theory to investigate the roles of information and technology in the existing diversity of organizations and in enabling the creating of new organizational forms.
The class is divided into four sections: (1) organizational performance; (2) coordination; (3) incentives; and (4) emerging issues. In each of these sections, we combine both classic readings from economics with applications. Given our respective expertise, many applications will be taken from the fields of information technology and human resource management.
The class is designed for Ph.D students in management, information technology, organizational behavior, industrial relations, economics, and related disciplines. For non-economists, this class offers an exposure to fundamental ideas in the economics of information and organizations. For economists, this class offers the opportunity to apply abstract economic ideas to the question of how the rise of information technology and related changes in the business environment affect organizations. The applied nature of the class may also be appealing to MBA students, willing to undertake the extensive reading assignments and class preparation required in a seminar class of this type.
A seminar class works because students come prepared to engage in thoughtful discussions of the material. Students are therefore asked to write informal, two page memos prior to each class. These memos will generally be responses to some questions or issues we pose prior to each class. Our purpose in assigning these memos is to help students reflect on important aspects raised in the assigned readings. In addition, each student will be asked to lead part of the class discussion. This will typically involve meeting with the instructor ahead of time to discuss objectives and discussion plans.
There are no exams in this class but a final paper is due at the end of the semester. It can be either a survey of the research in a particular area or a research paper on a specific topic. Either way, the paper can be thought of as a step towards developing a research program. In the past, some of these papers have led to publications. Further details of the paper will be provided in class.
Date Topic
2/10 Introduction: Trends in Technology and Trends in Organizational Structure
2/17 Organizational Performance I: IT Innovations and Performance
2/24 Organizational Performance II: HR Innovations and
Performance
3/3 Coordination I: Organizations as Information Processors
3/10 Coordination II: Organizations as Planning Mechanisms
* One Page Paper Proposal Due *
3/17 Incentives I: Incentives in the Context of Long-term Relationships
3/24, 3/31 * Spring Break *
4/7 Incentives II: Anomalies For the Economic Theory of Incentives.
* Outline of paper due*
4/14 Incentives III: Incomplete Contracts
4/21 Emerging Issues I: Value-adding Partnerships and Networked Organizations
4/28 Emerging Issues II: The Economics Professionals
5/5 Emerging Issues III: Information in the Age of its Digital Reproduction
5/12 Student Presentations.
* Final paper due *
1. Introduction: Trends in Technology and Trends in Organization
Recommended
MR*, Ch, 1,2
Drucker, Peter F. "The New Productivity Challenge" HBR November 1991.
Malone, Tom and John Rockart. (1991). Computers, Networks and the Corporation. Scientific American, Vol. 265 (No. 3), pp. 128-136.
Kiechel, W., "How We Will Work in the Year 2000", Fortune, 38-49, (May 17, 1993).
Think about:
For which sessions would you like to be the leader/facilitator?
* Milgrom & Roberts, Economics, Organization and Management, Prentice-Hall, 1992
2. Organizational Performance I: IT Innovations and Performance
Required:
Brynjolfsson, E., "The Productivity Paradox of Information Technology", Communications of the ACM, 1993, 35 (December): 66-77.
David, Paul A. (1989). Computer and Dynamo: The Modern Productivity Paradox in a Not-Too-Distant Mirror . Center for Economic Policy Research, Stanford, CA.
Hitt, L. and E. Brynjolfsson, "Creating Value and Destroying Profits? Three Measures of Information Technology's Contributions", mimeo.
Krueger, Alan. "How Computers Have Changed the Wage Structure," Quarterly Journal of Economics, February 1993, p.33-61.
Recommended:
Berndt, Ernst R., Catherine J. Morrison and Larry S. Rosenblum. (February, 1992). High-Tech Capital, Economic and Labor Composition in U.S. Manufacturing Industries: an Exploratory Analysis (Working Paper#3414EFA). MIT - EFA.
Bresnahan, T. F., "Measuring the Spillovers from Technical Advance: Mainframe Computers in Financial Services", The American Economic Review, 1986, 76 ( 4): 742-755.
Brynjolfsson, E. and L. Hitt, "Computers and Economic Growth: Firm-level Evidence", MIT Sloan 1994.
Caves, R. and M. Krepps, "Fat: The Displacement of Nonproduction Workers from U.S. Manufacturing Industries", Brookings Papers on Economic Activity: Microeconomics, 1993, (2): 227-288.
Diewert, W. E. and A. M. Smith., "Productivity Measurement for a Distribution Firm", NBER Working Paper 4812, (July 1994).
Write-up: Please submit 2 pages (500-600 words) on one of the following questions:
1) How is productivity defined? What do you think the principal benefits of IT are? Are researchers measuring the right thing(s)? Managers also have trouble measuring the benefits of IT. Does this suggest that IT is not being effectively used? Describe a methodology for testing your hypothesis about the IT and productivity.
2) One possible explanation for the "productivity paradox" is that we haven't adjusted our economic institutions to take advantage of the potential benefits of IT. Why would this be any more of a problem for IT than for other investments? How would you explore your hypothesis? What are the practical implications of your analysis?
3. Organizational Performance II: HR Innovations and Performance
The paradox for information systems is that we "see computers everywhere but in
the productivity statistics". The reverse paradox may apply to human resource
management: "we hear everywhere about performance boosts from high performance
work systems, but don't see them anywhere".
Required:
Ichniowski, Casey, Kathryn Shaw and Giovanna Prennushi, "The Effects of Human Resource Management Practices on Productivity", Mimeo June 1993, 1993
MacDuffie, J.P "Human Resource Bundles and Manufacturing Performance: Organizational Logic and Flexible Production Systems in the World Auto Industry"
Dunlop, John T. and Weil, David, "The Diffusion of Human Resource Innovations: Lessons from the Apparel Industry," (mimeo) October 1993.
"Complementarities and Fit: Strategy, Structure and Organizational Change in Manufacturing" Milgrom and Roberts (mimeo). Sept 2, 1994
Recommended:
Milgrom, Paul and John Roberts. (1990). The Economics of Modern Manufacturing: Technology, Strategy, and Organization. American Economic Review, Vol. 80 (No. 3), .
Levine, David and D'Andrea Tyson, Laura. "Participation, Productivity, and the Firm's Environment" in Paying for Productivity ed. by Alan S. Blinder Washington D.C.: Brookings 1990 183-244 1990
Kofman, Fred; Repenning, Nelson and Sterman, John D. "Unanticipated Side Effects of a Successful Quality Program: Exploring A Paradox of Organizational Improvement," MIT Working Paper, WP#3667-94-MSA, March 1994
Write-up: Please submit 2 pages (500-600 words) on question (2).
(1) Assess the evidence that human resource practices matter for organizational performance? Are the results convincing, generalizable?
(2) If new HRM systems matter so much for performance, why are they limited to a small number of firms (often greenfields)? Does this reflect organizational failures, market failures, or efficient adaptation to different market conditions? How can these possibilities be distinguished theoretically and empirically?
(3) Under what set of assumptions might the notion of complementarities be useful in answering either of the two preceding questions?
4. Coordination I: Organizations as Information Processors
Required:
M. Jensen and Meckling, W. (1992). Knowledge, Control and Organizational Structure Parts I and II. In Contract Economics, Lars, Werin, & Hijkander (Ed.), (pp.251-274). Cambridge, MA: Basil Blackwell.
Brynjolfsson, E. and H. Mendelson, "Information Systems and the Organization of Modern Enterprise", Journal of Organizational Computing, 1993, 3 (4):
Sah, Raaj Kumar and Joseph E. Stiglitz. (1986). The Architecture of Economic Systems. The American Economic Review, Vol. 76 (No. 4), pp. 716-727.
Radner, Roy. (1992). Hierarchy: The Economics of Managing. Journal of Economic Literature, Vol. XXX (September), PP. 1382-1415.
Malone, T. W. and S. A. Smith, "Modelling the Performance of Organizational Structures", Operations Research, 36 (May-June): 421-436, (1988).
Recommended:
Geanakopolos and Milgrom, "A Theory of Hierarchies Based on a Limited Managerial Attention," 1985, mimeo, Yale.
Stiglitz, Joseph E. (May, 1989). Incentives, Information and Organizational Design (Working Paper#2979). National Bureau of Economic Research.
Galbraith, Jay R. (1974). Organization Design: An Information Processing View. Interfaces, Vol. 4 (No. 3), pp. 28-36.
Hayek, F. A.(1945) The Use of Knowledge in Society . Institute for Humane Studies.
Minsky, Marvin (1986) The Society of Mind pp 1, 18, 23, 25, 28, 34. 35.
Write-up: Please submit 2 pages (500-600 words) on one of the following.
1. It has been argued that in order to improve organizational decision making, information and decisions should be "co-located". Indeed, co-location suggests a new way of thinking about the HR innovations discussed in the preceding class--firms are moving decision making authority to make better use of the valuable, if tacit, information collected by front line employees.
An alternative strategy is to move the information to those with decision-making authority. Moving information, however, requires that it be alienable. How might IT affect the alienability of information? What types of information will become more easily moved? What does this imply for organizational structure?
2. One problem with centrally-planned economies is the difficulty in assembling and analyzing all the economically-relevant information. It was argued (before the 1980s!) that computers and information technology would largely solve this problem. With the enormous strides made in IT, why does central-planning seem to have fallen out of favor from the Former Soviet Union to IBM?
Write-up:
One page listing up to three potential research topics. What will be your choice of research tools (e.g. theory development and application, econometric analysis, case study, field experiment, literature review and synthesis)?
5. Coordination II: Organizations as Planners
5.1 When to Plan? Plans and Directives as Substitute for Decentralized Incentives.
Required:
MR Ch. 4
"Mrs. Fields Cookies," HBS Case.
Recommended:
MR Ch. 3
Tully, Shawn. The Modular Corporation. Fortune, (February 8, 1993).
5.2 When to use Incentives? Decentralized Incentives as a Complement to Plans and Directives
Required:
Milgrom and Roberts, Chapter 7 "Risk Sharing and Incentive Contracts "Economics of Organizations and Management,.
Kaplan, Robert. (1989). "Management Accounting for Advanced Technological Environments". Science, Vol. 245 (September), pp 819-823.
Rodgers, T.J. (1990). "No Excuses Management." Harvard Business Review, 90409 (Jul-Aug),pp 84-98.
"Au Bon Pain" HBS Case
Recommended
MR Chpt. 5 and 6.
Baker, George. "Incentive Contracts and Performance Measurement," Journal of Political Economy 1992 100: 598-614.
Eisenhardt, Kathleen (1989). Agency Theory: An Assessment and Review, Academy of Management Review, p. 57-74
Write-up: Please submit 2 pages (500-600 words) on one of the following.
1. Answer quantitative problem #5 (p. 199) at the end of MR chapter 6.
2. The Partner-Manager Program in Au Bon Pain (ABP) can be seen as an attempt to use a linear incentive contract to resolve a principal-agent problem. Mrs. Fields Cookies (MFC), illustrates an IT based strategy for resolving principal agent problems in a way that does not rely upon incentives. Compare and assess the ABP and MFC approaches. Under what circumstances is one approach superior to the other?
3 Is more information always a good thing in a principal agent context?
6. Incentives I: Incentives in Long-Term Relationships.
The theory of incentives developed so far applies to short-term (or even one time) relationships between principals and agents. In long term relationships, however, very different sorts of incentive arrangements (with very different outcomes) can be sustained.
We begin this class by introducing the theory of repeated games and then applying that theory to a simple strategy known, somewhat misleadingly, as an efficiency wage strategy. We then proceed to studies of the empirical application of efficiency wage theory to the study of particular organizations.
6.1 The Theory of Efficiency Wages, Deferred Compensation, and Performance Bonds
Required:
Gibbons, Robert. Game Theory for Applied Economists, Princeton New Jersey: Princeton University Press., 1992 p.88-99, p.107-112.
Dickens, William T., Katz, Lawrence F., Lang, Kevin, and Summers, Lawrence H. "Employee Crime and the Monitoring Puzzle", Journal of Labor Economics 7:3 331-347. 1989
Recommended:
Malcomson, James M. Work Incentives, Hierarchy, and Internal Labor Markets, Journal of Political Economy, June 1984 92: 486-507.
Axelrod, R. "The Evolution of Cooperation" (excerpts)
6.2 Empirical Applications of Efficiency Wage Theory
Required
Rebitzer and Taylor, "Efficiency Wages and Employment Rents: The Employer Size Wage Effect in the Job Market for Lawyers," Journal of Labor Economics (forthcoming )
Krueger, Alan B. "Ownership, Agency, and Wages: An Examination of Franchising in the Fast Food Industry," Quarterly Journal of Economics
Rebitzer, "Is There a Trade-Off Between Supervision and Wages? A Test of Efficiency Wage Theory," Journal of Economic Behavior and Organization (forthcoming)
Recommended
Capelli, Peter and Chauvin, Kevin. An Interplant Test of the Efficiency Wage Hypothesis, Quarterly Journal of Economics, August 1991 106:3 769-780 1991
Groshen, Erica L. and Krueger, Alan B. The Structure of Supervision and Pay in Hospitals, Industrial and Labor Relations Review, February 1990, 43:3, 134-S-146-S.
Questions: TBA
7. Incentives II: Anomalies.
7.1 Trust
Required:
Baker, George; Gibbons, Robert; and Murphy, Kevin J. Subjective Performance Measures in Optimal Incentive Contracts, Quarterly Journal of Economics Feb. 1993
Frank, Robert, Passions Within Reason
Recommended
Kahneman, Knetsch and Thaler, "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, 76:4, 728-741.
7.2 The Limited Use of Monetary Incentives Within Firms
Required
Baker, George P., Jensen, Michael C. and Murphy, Kevin J. Compensation and Incentives: Practice vs. Theory, The Journal of Finance, July 1988, 43:3, 593-616.
Holmstrom, Bengt and Milgrom, Paul. Multi-task Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design, Journal of Law, Economics and Organization Spring 1991 7 24-52
Recommended
Holmstrom, B. (1989). "Agency Costs and Innovation," Journal of Economic Behavior and Organization, 12, 305-327.
Write-up: Please submit 2 pages (500-600 words) on one of the following.
1. Compare the notion of trust developed in Frank to that presented in Baker, Murphy and Gibbons. Are the two notions of trust distinct? Can they be distinguished empirically? How?
2. Holmstrom and Milgrom's model of multi-task principal agent problems is presented with little in the way of empirical support. Can you think of an empirical test of their model? How would you go about such an empirical project?
8. Incentives III: Incomplete Contracts
8.1 Transactions Costs
Required:
MR p. 28-42
Malone, Thomas, JoAnne Yates and Robert Benjamin (1987). Electronic Markets and Electronic Hierarchies. Communications of the ACM. Vol. 30 No 6,
Recommended
Williamson, O.E. (1989). Transaction Cost Economics and Organization Theory. In Handbook of Economic Sociology, 1994.
Coase, R.H. (1988). The Nature of the Firm: Origin, Meaning, Influence. Journal of Law, Economics, and Organization. Vol. 4 No 1.
Gurbaxani, Vijay and Whang (1991). The impact of information systems on organizations and markets. Communication of the ACM. Vol. 34 No 1, pp. 59-73.
Brynjolfsson, E., T. Malone, V. Gurbaxani and A. Kambil, "Does Information Technology Lead to Smaller Firms?", Management Science, 1994, 40 (12):
8.2 Incomplete Contracts
Required:
MR Ch. 9
Hart, Oliver. (1989). An Economist's Perspective on the Theory of the Firm. Columbia Law Review, Volume 89 (No. 7).
Hart, Oliver and John Moore. (1990). "Property Rights and the Nature of the Firm." Journal of Political Economy, 98 (December), 1119-1158.
Brynjolfsson, E., "Information Assets, Technology, and Organization", Management Science, 1994, 40 (12 (December)):
Recommended:
Holmstrom, Bengt R. and Jean Tirole. (1989). The Theory of the Firm. In Handbook of Industrial Organization, R. Schmalansee, & R. Willig (Ed.), Amsterdam: Elsevier Science Pub. Co. Especially the first two sections (pp. 63-78).
Grossman, Sanford and Oliver Hart. (1986). "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration". Journal of Political Economy, No. 4 . The insurance industry example at the end of the article (pp. 710-718) is useful. It is not necessary to follow the mathematical treatment in detail.
Write-up:
Please write on the following:
1. Incomplete contracts theory equates asset ownership with residual decision rights. How does the theory apply to situations in which assets are essentially controlled by individuals other than their owners (for example, a firm which is run by a hired manager), who then enter into contracts as agents of the owners? Are there other definitions of "ownership," "control," and "residual decision rights" more appropriate to this situation? Can an employee's information be considered an asset which gives him or her residual rights? What are the implications of this (for example, effects on the choice of incentives or on the degree of autonomy granted to employees)?
9. Emerging Issues I: Value-adding Partnerships and Buyer-Supplier Relationships
Required:
MR ch. 16, "The Boundaries and Structure of the Firm".
MR Ch. 17, "The Evolution of Business and Economic Systems".
Holmstrom, B. and P. Milgrom, (1992). "The Firm As An Incentive System." American Economic Review, Sept. 1994, 972-991
Bakos, J. Y. and E. Brynjolfsson, "From Vendors to Partners: Information Technology and Incomplete Contracts in Buyer-Supplier Relationships", Journal of Organizational Computing, 1993, 3 (3): 301-328.
Johnston, Russell and Paul Lawrence. (1988). Beyond Vertical Integration - the Rise of the Value-Adding Partnership. Harvard Business Review, (July-August), pp. 94-101.
Loh, L. and N. Venkatraman (1992). Determinants of Information Technology Outsourcing: A Cross Sectional Analysis. Journal of Management Information Systems.
Recommended:
Helper, S., "Supplier Relations and Investment in Automation: Results of Survey Research in the U.S. Auto Industry", Dept. of Economics, Case Western Reserve University Working Paper (September 1991b).
Byrne, J.A., "The Virtual Corporation," BusinessWeek, Feb 8, 1993, 98-103.
Venkatraman, N. and James E. Short (1991). Strategies for Electronic Integration: from Order Entry to Value Added Partnerships at Baxter. Sloan WP NO. 3164-90.
Womack, James P., Daniel T. Jones and Daniel Roos (1990). Chapter 6: Coordinating the Supply Chain in The Machine that Changed the World, Rawson Associates.
10. Emerging Issues II: Communities of Professionals.
10.1 Economics of Firms When Knowledge is A Key Asset
Required:
Rebitzer and Taylor "Property Rights and Employment Relationships: An Institutional Analysis of the `Up-or-Out' System in Law Firms". mimeo 1994.
Orlikowski, Wanda J. "Learning from Notes: Organizational Issues in Groupware Implementation". CSCW `92 Proceedings, November 1992
Recommended
Gilson, Ronald and Mnookin, Robert. "Sharing Among Human Capitalists: An Economic Inquiry into the Corporate Law Firm and How Partners Split Profits," Stanford Law Review January 1985 37:2 313--92
Farrell, Joseph and Scotchmer, Suzanne. Partnerships, Quarterly Journal of Economics, May 1988, 103:2, 279-298.
10.2 The Economics of Firms When There are Substantial Knowledge Externalities.
Required:
Saxenian, Analee. Regional Advantage: Culture and Competition in Silicon Valley and Route 128, Chapters 2 and 6
Kremer, Michael "The O-Ring Theory of Economic Development," The Quarterly Journal of Economics, 108:3, August 1993
Recommended
Roth, Alvin E. and Xiaolin Xing, "Jumping the Gun: Imperfections and Institutions Related to the Timing of Market Transactions" American Economic Review, Sept. 1994, 992-1044.
10.3 The Economics of Superstars.
Required:
"Winner Take All Markets" by Frank and Cook, Mimeo December 1992.
Recommended
Rosen, "Authority, Control, and the Distribution of Earnings," Bell Journal of Economics, Autumn 1982, 311-23.
Questions: TBA
11. Emerging Issues III:
Information in the Age of Its Digital
Reproduction
12.1 Property Rights to Information and Knowledge
Required:
Davis, R., M. Kapor and P. Samuelson. Title tba. Columbia Law Journal.
Besen, Stanley M. and Leo J. Raskind. (1991). An Introduction to the Law and Economics of Intellectual Property. Journal of Economic Perspectives, Vol. 5 (No. 1), pp.3-27.
Recommended:
Hirschleifer, J. "The Private and Social Value of Information and the Reward to Inventive Activity." American Economic Review (1971) V 61 pp. 562-574.
Samuelson, Pamela. (1991) Digital media and the law; Legally Speaking. Communications of the ACM, Vol. 34; No. 10 (October, 1991) Pg. 23.
David Paul, "Intellectual Property Institutions and the Panda's Thumb,"
Gilbert, Richard and Carl Shapiro. (1990). Optimal Patent Length and Breadth. Rand Journal of Economics, Vol.21 (No. 1).
12.1 Information Overload and Information Filtering
Required:
Avery, Chris, Resnick Paul, and Zeckhauser, Richard. "Collaborative Filtering Mechanisms," draft working paper, September 1994.
Robinson, Mike (1991) Through a lens smartly. BYTE, Vol. 16, No. 5 (May 1991), Pg. 177. This article describes the Information Lens project at the MIT Center for Coordination Science.
Patty Maes. Collaborative Information Filters. Communications of the ACM. July-August, 1994.
Drexler and Miller. "Markets and Computation: Agoric Open Systems" in The Ecology of Computation; Huberman, B.(Ed.)p 133-176
Write-Up
1. For what types of information would technical solutions (such as software agents) be most likely to work well? For what types would pricing mechanisms work well? For what types would property rights (e.g. patents) work well?
2. Suggest a pricing mechanism for information sharing, either a) for the "information highway" among companies and consumers or b) for use within a single company or organization.
Explore:
Log on to the World Wide Web and explore collaborative filtering at:
http://www.osf.org:8001/boston-food/boston-food.html, and
http://rg.media.mit.edu/ringo
12. Student Presentations:
12 Student Term Papers
Each Student will be asked to submit an extended abstract along with their paper so that their classmates can read it ahead of time. Each student will present his or her findings in this class, with time for discussion.
MIT Sloan School of Management
15.575 Research Seminar on Information and Organizations:
Economic Perspectives
STUDENT INFORMATION SHEET
Name____________________________________________________________________
Email Address:_____________________________________________________________
Term Address:_____________________________________________________________
Home Phone:__________________________ Office Phone (if any):_________________
School/Dept. ____________________________ (Sloan, Comp. Science, STS ..)
Program (Ph.D, Masters, Fellows)______________Year (1st, 2nd...) _________
List the courses in organization theory, information systems, economics, and/or human resources that you have taken at MIT or elsewhere.
List any relevant work experience you have had.
What are your goals for this course?