PHDBA279B

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Incentives and Organizations in Markets PHDBA 279B - Incentives and Organizations in Markets is a class offered to doctoral students at UC Berkeley, and is a field requirement for PhDs in BPP at the Haas School of Business. This page details the course as it was taught by John Morgan and Steve Tadelis in the Spring of 2010. The course webpage provides the official requirements. The evaluation of the course is based on class participation and the presentation of two papers (50%) and one course paper (50%). The course paper must "use theory in a significant way", and should be of a quality such that with additional work and polishing it could be publishable. Specifically, students are expected to write down a model and work out at least one interesting result. Either numerical examples or special cases that could be generalized are acceptable.

1st Half

The first half was taught by John Morgan (email and website).

Paper List

The paper list by class number is as follows (the first paper listed is invariably the key paper):

0.) The two principles: Revelation and Revenue Equivalence

Main ideas: The revelation principle forms the cornerstone for the theory of contracts and incentives in organizations. This topic reviews the revelation principle, the principal families of contract theory models, and the mechanism design paradigm.

  • Chapters 8.E and 13 of Microeconomic Theory by Andreu Mas-Colell, Michael Whinston, and Jerry Green. Oxford University Press, 1995.
  • Dewatripont, M., L. Hansen and S. Turnovsky (2003), "Why Every Economist Should Learn Some Auction Theory", Advances in Economics and Econometrics: Invited Lectures to 8th World Congress of the Econometric Society, Cambridge University Press. link pdf
  • Morgan, John and Tanjim Hossain (2006), "...Plus Shipping and Handling: Revenue (Non)Equivalence in Field Experiments on eBay", Advances in Economic Analysis & Policy, Vol. 6: No. 2, Article 3. link pdf

1.) Search

Main idea: This topic surveys a variety of consumer search models. The two principles play an important role in generalizing some of the findings. These models are cornerstones for modeling price competition.

2.) Contests

Main idea: This topic surveys the contest/all-pay auction literature. Again, the two principles prove extremely useful. This literature is the cornerstone for modeling political competition, patent and R&D races, and so on.

  • Nitzan, Shmuel (1994), "Modeling Rent Seeking Contests", European Journal of Political Economy, Elsevier, vol. 10(1), pages 41-60, May. link pdf
  • Bulow, Jeremy and Paul Klemperer (1999), "The Generalized War of Attrition", The American Economic Review, Vol. 89, No. 1. (Mar.), pp. 175-189. link pdf
  • Brown, Jennifer (2007), "Quitters Never Win: The (Adverse) Incentive Effects of Competing with Superstars", UC Berkeley Working Paper link pdf

Note that in subsequent years Nitzan (1994) will be replaced with:

  • Konrad, Kai A. (2007), "Strategy in Contests-An Introduction", WZB-Markets and Politics Working Paper No. SP II 2007-01, link pdf

3.) Platform Competition

Main idea: This topic highlights the emerging literarture on platform competition and two-sided markets. The revenue equivalence principle sees a little sue here as well. These are the leading modeling approaches for markets that are increasingly prominent.

  • Ellison, Glenn, Fudenberg, Drew, and Möbius, Markus (2004), "Competing Auctions", Journal of the European Economic Association, Mar, Vol. 2 Issue 1, p30-66 link pdf
  • Caillaud, Bernard and Bruno Jullien (2003) "Chicken & Egg: Competition among Intermediation Service Providers", The RAND Journal of Economics, Vol. 34, No. 2. (Summer), pp. 309-328. link pdf
  • Brown, Jennifer and John Morgan (2009), "How much is a Dollar Worth? Tipping versus Equilibrium Coexistence on Competing Online Auction Sites", Journal of Political Economy, Vol. 117, No. 4, pp. 668-700. link pdf

4.) Cheap talk

Main idea: This topic covers information flows in organizations by examining an archetypal class of signaling games in business and public policy---corporate lobbying as cheap talk.

  • Grossman, Gene and Elhanan Helpman (2001), "Special Interest Politics", Chapters 4 and 5, MIT Press pdf

5.) Contracting under imperfect commitment

Main idea: This topic ties together the two principles with the previous unit on cheap talk signaling. The role of delegation in organizations is stressed.

  • Dessein, Wouter (2002), "Authority and Communication in Organizations", The Review of Economic Studies, Vol. 69, No. 4. (Oct.), pp. 811-838. link pdf
  • Krishna, Vijay and John Morgan (2008), "Contracting for information under imperfect commitment", RAND Journal of Economics, Winter, Vol. 39, No. 4, pp. 905-925. link pdf

6.) Incomplete Contracts

Main idea: To tie together the classic incomplete contracting works with mechanism design.

  • Hart, Oliver and John Moore (1988), "Incomplete Contracts and Renegotiation", Econometrica, Vol. 56, No. 4. (Jul.), pp. 755-785. link pdf
  • Aghion, Philippe, Mathias Dewatripont, and Patrick Rey (1994), "Renegotiation Design with Unverifiable Information", Econometrica, Vol. 62, No. 2. (Mar.), pp. 257-282. link pdf

2nd Half

The second half was taught by Steve Tadelis (email and website).

Paper List

The paper list by class number and sub-section is as follows, with required readings in bold:

Sub-Section I.) Reputational Incentives

Class 1.) Career Concerns and "Signal Jamming" Models (3/16/10)

  • Fama, E.F. (1980), "Agency Problems and the Theory of the Firm," Journal of Political Economy, 88(2): 288 307 (Supplemental Reading) pdf
  • Holmstrom B., (1999) "Managerial Incentive Problems: A Dynamic Perspective," Review of Economic Studies, 66(1): 169-182 pdf
  • Holmstrom B. and J. Ricart i Costa (1985), "Managerial Incentives and Capital Management," Quarterly Journal of Economics, 101(4): 835 860 (Supplemental Reading) pdf
  • Gibbons, R. and K.J. Murphy (1992), "Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence," Journal of Political Economy, 100(3): 468 505. pdf
  • Dewatripont, M., I. Jewitt and J. Tirole (1999) "The Economics of Career Concerns, Part I: Comparing Information Systems," Review of Economic Studies, 66(1): 183-198 (Supplemental Reading) pdf
  • Dewatripont, M., I. Jewitt and J. Tirole (1999) "The Economics of Career Concerns, Part II: Applications to Missions and Accountability of Government Agencies," Review of Economic Studies, 66(1): 199-217 (Supplemental Reading) pdf
  • Prendergast, C. and L. Stole (1996) "Impetuous Youngsters and Jaded Old-timers: Acquiring a Reputation for Learning," Journal of Political Economy, 104: 1105-1134 (Supplemental Reading) pdf
  • Meyer, M., and J. Vickers (1997) "Performance Comparisons and Dynamic Incentives," Journal of Political Economy, 105(3): 547-581 (Supplemental Reading) pdf

Class 2.) Signaling Models of Reputation (4/6/10)

  • Kreps, D., P. Milgrom, J. Roberts and R. Wilson (1982) "Rational Cooperation in the Finitely Repeated Prisoners' Dilemma," Journal of Economic Theory, 27(2): 245 252 (Supplemental Reading) pdf
  • Diamond, D. (1989), "Reputation Acquisition in Debt Markets," Journal of Political Economy, 97(4): 828 862 pdf
  • Horner, J. (2002) "Reputation and Competition," American Economic Review 92(3):644-663 (Supplemental Reading) pdf

Class 3.) Reputation as a Tradeable Asset and Incentive Provision (4/13/10)

  • Kreps, D. (1990) "Corporate Culture and Economic Theory," in J. Alt and K. Shepsle, Eds. Perspectives on Positive Political Economy, Cambridge University Press (Book excerpts available through Google Books)
  • Tadelis, S. (1999) "What’s in a Name? Reputation as a Tradeable Asset," American Economic Review, 89(3): 548 63 (Supplemental Reading) pdf
  • Tadelis, S. (2001) "The Market for Reputations as an Incentive Mechanism," Journal of Political Economy 110(4):854-882 pdf
  • Mailath, G., and L. Samuelson (2001), "Who Wants a Good Reputation?" Review of Economic Studies, April (reprinted with typo corrections in July) (Supplemental Reading) pdf

Sub Section II.) Empirical Tests of Reputational Incentive Models

Class 4.) Reputational Incentives (4/20/10)

  • Jin, G. and P. Leslie (2009) "Reputational Incentives for Restaurant Hygiene", American Economic Journal: Microeconomics, 1(1): 237-67 (Supplemental Reading) pdf
  • Cabral, Luis and Ali Hortacsu (2008) "Dynamics of Seller Reputation: Theory and Evidence from eBay" forthcoming, Journal of Industrial Economics pdf

Class 5.) Reputational Incentives cont. (4/27/10)

  • McDevitt, Ryan (2010) "Names and Reputations: An Empirical Analysis," mimeo, northwestern university (pdf not available at this time)
  • McDevitt, Ryan (2010) "A Business by Any Other Name: Firm Name Choice as a Signal of Firm Quality.," mimeo, northwestern university (pdf not available at this time)
  • Hubbard, Thomas (2002) "How Do Consumers Motivate Experts? Reputational Incentives in an Auto Repair Market," Journal of Law and Economics, October 2002, 437-468. (Supplemental Reading) pdf
  • Resnick, Paul, Richard Zeckhauser, John Swanson, and Kate Lockwood (2006) "The Value of Reputation on eBay: A Controlled Experiment," Experimental Economics, Volume 9, Number 2 (Supplemental Reading) pdf

Sub Section III.) Models of Procurement and Organization

Class 6.) Procurement Theory (5/4/10)

  • Levin, Jonathan and Steven Tadelis (2008) "Contracting for Government Services: Theory and Evidence from U.S. Cities," forthcoming, Journal of Industrial Economics. pdf
  • Williamson, Oliver E. (1971), "The Vertical Integration of Production: Market Failure Considerations," American Economic Review, 61:112-23. pdf
  • Goldberg, Victor P. (1977) "Competitive Bidding and the Production of Precontract Information," Bell Journal of Economics, 8:250-261 pdf
  • Holmstrom, Bengt and Paul Milgrom (1991) "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership and Job Design". Journal of Law, Economics and Organization 7:24-52. (Supplemental Reading) pdf
  • McAfee, Preston and McMillan, John (1986) "Bidding for Contracts: a Principal-Agent Analysis," RAND Journal of Economics 17(3):326-338. (Supplemental Reading) pdf
  • Bulow, Jeremy and Paul Klemperer (2006) "Auctions vs. Negotiations," American Economic Review 86:180-94.(Supplemental Reading) pdf
  • Hart, Oliver, (1995) "Firms, Contracts and Financial Structure", Oxford, Oxford University Press, 1995. (Supplemental Reading) (Book excerpts available through Google Books)
  • Hart, Oliver, Shleifer, Andrei and Vishny, Robert (1997) "The Proper Scope of Government: Theory and an Application to Prisons," Quarterly Journal of Economics, 112(4):1127-61 (Supplemental Reading) pdf
  • Bajari, Patrick and Steven Tadelis (2001) "Incentives Versus Transaction Costs: A Theory of Procurement Contracts." RAND Journal of Economics 32:387-407. (Supplemental Reading) pdf

Readers may also be interested in (added by Ed):

  • Kirkegaard, René (2006), "A short proof of the Bulow-Klemperer auctions vs. negotiations result", Economic Theory; June, Vol. 28 Issue 2, p449-452. pdf

Sub-Section IV.) Procurement and Organization: Empirical Applications

Class 7.) Empirics on Procurement (5/6/10 Thursday or 5/11/10 Tuesday)

  • Banerjee, A. and Duflo E. (2000) "Reputation Effects and the Limits of Contracting: A Study of the Indian Software Industry," Quarterly Journal of Economics, 115:989-1018. pdf
  • Forbes, Silke J. and Mara Lederman, (2009) "Adaptation and Vertical Integration in the Airline Industry," American Economic Review, forthcoming. pdf
  • Forbes, Silke J. and Mara Lederman, (2010) "The Performance Implications of Vertical Integration: Evidence from the Airline Industry," mimeo. (Supplemental Reading) (pdf not available at this time)
  • Bajari, Patrick, Stephanie Houghton and Steven Tadelis (2010) "Bidding for Incomplete Contracts: An Empirical Analysis," mimeo (Supplemental Reading) pdf
  • Corts, Kenneth and Jasjit Singh (2004) "The Effect of Repeated Interaction on Contract Choice: Evidence from Offshore Drilling," Journal of Law, Economics and Organizations 20:230-260. (Supplemental Reading) pdf
  • Bajari, Patrick, Robert McMillan and Steven Tadelis (2009) "Auctions versus Negotiations in Procurement: An Empirical Analysis," Journal of Law, Economics and Organization 25:372-399 (Supplemental Reading) pdf
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