Our emphasis will be on for-profit firms, but much of what we cover will also apply to not-for-profit organizations, such as the university students in this class are attending. In intermediate microeconomics the student is confronted with a theory of the firm that is totally symmetric with the theory of the consumer. In that theory the firm is a decision maker whose objective is to maximize profit. The theory is meant to apply equally well to a small proprietorship (where the theory may be a good approximation of reality) and to a very large corporation (where the theory abstracts entirely from many interesting economic issues of the goings on inside the firm that will be of concern in this course).
Even in a small family run business or a modestly sized partnership, there are multiple decision makers whose preferences need not agree. How do those preferences get aggregated into a coherent preference for the entire organization? One possible way of doing this is to make one person the dictator, in which case that person’s preferences matter for the organization while none of the other organization members’ preferences matter. Recognizing that dictatorship produces coherent decision making, it certainly doesn’t accommodate the interests of other stakeholders. Arrow’s Impossibility Theorem, tells us that apart from dictatorship there is no “rule” to do this that accounts for the preferences of all organization members. Organizations must find a process, imperfect thought it may be, to accommodate preferences of the various stakeholders, since their collective decision making can’t be derived from rules.
This observation is intimately tied to the next point. Each member of the organization brings talents, resources, and information that other members of the organization do not possess. The organization must motivate members to participate in a way that provides for the good of the organization as a whole and to share information in a way that is jointly profitable. Thus the organization’s duel goals are to provide coherence to the decision making and to motivate members to act on behalf of the organization. These goals are pursued in an environment that is sufficiently complex where it is far from transparent to identify the best organizational behavior, even when the evaluation is done by well-informed insiders.
The economics approach to the organization abstracts from much of the complexity, treats the distribution of preferences, production capabilities, and information as exogenous, and then identifies efficient structures and contract forms for achieving the goals within that setting. The virtue of the economics approach is in establishing a framework for thinking about what might be possible for the organization and in producing well-reasoned conclusions about what efficient structures look like. This framework is the focus of the course.
However, economists are not the only ones who think hard about organizational issues. Indeed, these questions are often thought to be what gives management its purpose and sometimes, apart from management, the same issues are addressed by the leadership of organizations members, where this means leadership from not just those at the top. Thus organization issues are part and parcel of management education and quite often are part of leadership training as well. One would like to know how these other approaches to organization compare with the economics approach. Some of the course will be devoted to addressing that.
A couple of excellent readings that bridge the different approaches are (1) Herbert Simon’s Nobel Prize Lecture and (2) George Akerlof’s paper on Labor Contracts As Partial Gift Exchange. Both pieces make an appeal to move away for the standard neoclassical model (the subject of intermediate microeconomics) and take a fundamentally interdisciplinary approach to the issues. Students are encouraged to read these papers on their own to get a better sense of why an interdisciplinary approach is needed.
In the course, however, rather than read individual articles on the subject for which the students might not have the appropriate background, we will follow a textbook that proceeds starting from the neoclassical model and then gradually moves away from it in different ways, with the first such step a discussion of “transfer pricing” that begins in chapter 3. Pedagogically, the idea is to start with ideas familiar from intermediate microeconomics and then introduce the unfamiliar new ideas in small doses. Each subsequent chapter adds a different piece to the puzzle. We will cover the textbook at a pace that fits the class. Where the content is difficult we will slow down. Better to learn what we do cover than to be exhaustive but superficial in the treatment. Do note, however, that we definitely will not
cover the chapters on Finance, as these are suitable to be learned in other courses.
Regarding the math modeling in the textbook do note that the way it is presented depends on the intended audience - MBA students. So much of the math in the book is done via examples rather than by general models and in some cases rather dramatic simplifying assumptions are made to facilitate the analysis. In some cases we will follow the book exactly. In other cases we will depart from the book a bit to look at the approach in greater generality.
To get exposure to non-economic approaches we will also read another textbook that is often used in leadership training, as a way to get multiple perspectives on the organization. Students will likely find this second book “lighter fare,” far less analytical and more anecdotal in its approach, and therefore a contrast with the primary text. We will cover this other book except for its last section, which has an emphasis on leadership. Students are encouraged to read that after the course has concluded, as they likely will have intrinsic interest in the subject.
Tentative Class Format
Once we get up to speed, certainly by the third week of the semester, we will take a dual approach into the subject. One aspect will be a narrative/story telling approach. The other aspect will be a math/problem solving approach. Roughly speaking, Mondays will be for the narrative story/telling and Wednesday will be for the math modeling and problem solving. Time permitting we'll also spend Wednesdays critiquing the models or giving talkie discussions about how the models might be extended, so there will be narrative story/telling in that.
There is also a goal to create a cycle between the out of class work that students are assigned and our in class activities. Students will do two different sorts of homework, (1) blogging and (2) math model exercises done in Excel. The blogging will mainly be reflections of the class discussion and readings, particularly as it pertains to the student's own experience. To make the ideas part of your own world view you must first get familiar with the ideas by using them in context and second you must establish connections between the ideas and other things you already know. The blogging is there to help with both of those.
To motivate the blogging more I plan to comment on each of your posts and then use some of the Monday time to discuss points brought up by students. I will not grade individual posts. Rather, I will use a portfolio approach to the blogging, giving one grade at mid semester on the first half of your posts and a second grade near the end of the course. At around the time of the mid semester evaluation, I would like to meet with you each individually outside of regular class hours to discuss your blogging and how the course is going for you, perhaps to offer pointers on how to improve your performance. I will announce when I'm ready to have those meetings. After that I will expect you to contact me to set up a meeting time.
The approach with the math modeling is different. My intent is for the homework to be auto-graded (built into Excel) and for you to do it till it's all correct. So the grade on that will only be a participation grade for having completed the assignment correctly (and that you submit the result by the deadline). I intend to make micro-lecture videos for you to view online to aid you to do this homework. The in class time on Wednesday's is meant for me to play the role of TA and review the problems so you understand them at a deeper level. In other words, for the math modeling the homework is meant as preparation for the live class. To motivate this the bulk of he exam questions will be of the math modeling sort and will be tweaks on the homework problems. Coming to class on Wednesday will then be good preparation for the exams.
After a couple of weeks of this we will do some evaluation to see how it is working. I'm a big believer in early feedback from students influencing the approach taken thereafter. So we'll surely tweak the approach based on that and on my impressions of how the course is going.
Note that the questions in this early evaluation will parallel questions about organizations:
- What are the organization's goals?
- How is coherence (alignment) achieved so that members of the organization have their individual efforts come together in productive organization function?
- How are individuals motivated to deliver their best effort?
- This question is sometimes broken up into the role of extrinsic motivation (pay for employees, grades for students) and the role of intrinsic motivation (the work itself as an object of engagement and satisfaction).
Treating Students as Adults, Class Attendance, and Senioritis
Eighty percent of success is showing up.
Woody Allen
Last spring I taught an early version of this course. There were only 9 students so I opted to teach the class as a seminar. Attendance was required. Nonetheless, actual attendance was spotty. Some of this was due to illness. And some of it was students going to job interviews or participating in campus activities that would take them out of town. But much of it was simply cutting class. And even for those who did show up, some came 10 or 15 minutes after class was scheduled to start. I believe there was an infectious aspect to this sort of shirking. Seeing low attendance in the class or students not taking the class seriously other students were encouraged to do likewise. Students also turned work in after deadlines or failed to do the work entirely. Since the student blogs were public, other students knew. This too could very well have created a negative feedback loop for the class as whole.
Although I understand senioritis, I was surprised by this outcome. Since the class was small, students were taking a course in the major, and I have considerable experience as an instructor, I assumed those factors were sufficient to get all students to participate vigorously in the class. I am a bit less idealistic as a consequence but perhaps a bit wiser as well in regard to students' actual circumstance.
The expression goes, when in Rome do as the Romans do. I hope that what the Romans do in my class is to act like responsible adults. If that is the norm then nothing else will be said about it for the duration of the course. If it seems like senioritis starts to take over, then some adjustments will be made as a consequence.
Note that attendance will not be required this time around and there is no part of your grade explicitly tied to attendance. Thus, I want the acting like an adult expectation to be in the spirit of Akerlof's Gift Exchange. With that we might have a discussion about what gift I should be providing for the students to complete the exchange. I would like that gift to be other than the course grade. Do note that in Akerlof's paper, the gift the employer gives is to pay a way in excess of the employee's reservation wage. The differential is then interpreted as the gift.
Deadlines for Homework/A Word About Deadlines
The Deadline for Blog Posts is Thursday evening at 11 PM. (Getting them done sooner is perfectly okay.) I will read them and comment on them either on Friday or over the weekend. We will discuss the posts in Monday's class session. If you get the post in at midnight or in the wee hours on Friday, that will have no consequence on my reading, so you will not be penalized for that. In that sense the purpose of the 11 PM deadline is to communicate something about me. I'm a fifty something with kids approximately your age. As a result I know something about student nocturnal patterns. Better to stick with my deadline and have fun after than vice versa. If you are later than the early hours on Friday with your post, it will be hit or miss for you as to whether I read and comment on it. If it is a miss, you won't get credit for that post.
There will be Math Exercises in Excel some weeks, but not all weeks. You will be clearly alerted when one is due. The deadline for completion of these exercises is Tuesday evening at 11 PM. I will check the submission form Wednesday morning before class. All the same caveats apply about getting credit.
Blogging and Privacy
Each student in the class will have a blog. Students will use the blog to write weekly reflective pieces as well as to post any presentation material they prepare (or to link to such material). As you might gather from this course site, I like to use Blogger. You are free to use that or any other commercial blogging software or you can use a blog in the class Moodle site. If you want a blog in Moodle, I have to set it up for you, so please let me know. I encourage you to use a public blog because that way the rest of the class is better able to see what you write. You are also encouraged to comment on your classmates posts, as that is a way to build community within the class.
If you use Blogger or most other commercial blogging software, they have a place for your profile. In your profile you get a display name. One significant purpose of your assigned alias is to use that for you display name. I expect each student to blog under their alias (typically the name of a famous economist concatenated with Econ490).
Experience suggests that students may be reluctant to have their course work viewed by potential future employers. This approach with display name should be sufficient that potential employers can't track your blog. Using Moodle offers even more privacy. It is somewhat less convenient, however. For example, individual posts don't get a permalink, so can't readily be referenced in the posts of others. It is your choice which to use.
There will be specific instructions for setting up your blog given in class. When you've done so and made your first post, please email me with the url to that. I will have a gadget on the class site that provides snippets from the most current posts by students.
Post should be between 500 and 1000 words. They are meant to demonstrate your thinking and should take some time to compose. Students who are new to writing blog posts (and who don't write frequently in general) should understand that there needs to be some time before you go to the keyboard, just to organize your thoughts and to give you a general sense of what you want to say. That is called pre-writing. It is quite important. If you do that, you'll find the time composing text enjoyable. If you don't, you'll likely get writer's block and find the blogging requirement drudge work.
Grading
Composition of Grades
Blogging 30%
Excel Homework 10%
Midterm 1 15%
Midterm 2 15%
Final 30%
Final Course Grades
A = 90% and above
B = 80% - 89%
C = 70% - 79%
F = Below 70% (I don't give out D's.)
Tentative Class Schedule
Aug 27 – Course Overview, student consumption experiences with different organization structures at places they buy, the Campus as an economic organization.
Aug 29 – M&R Chapter 1, historical examples of different organization structures as ways to innovate on previous structures and changes in the economic environment. B&D Chapter 1, the four frames.
Sept 3 – Labor Day
Sept 5 – Technology demo for which it would be good for students to bring laptops to class. Catch up on what should have been covered during first week but wasn't
Sept 10 – M&R Chapter 2, the neoclassical model on profit maximization as the goal of the firm, quasi-linear preferences, Pareto Optimality as the key efficiency concept, transaction costs. B&D Chapter 2, mistakes in real world decision making due to the inherent complexity and not understanding the situation.
Sept 12 – When doesn’t it make sense for a firm to maximize profits at given market prices? Market Failure. Review of some questions from the end of M&R Chapter 2. B&D Chapter 3, Getting Organized. Since the section of B&D entitled, “The Structural Frame” is the closest part of the book to M&R, we’ll cover it lightly to avoid too much duplication.
Sept 17 – M&R Chapters 3 and 4 on coordination with prices, on the one hand, and management, on the other. This is the beginning of the move away from the pure neoclassical theory of the firm to an economics of organizations. B&D Chapter 4, Structure and Restructuring.
Sept 19 – HW #1. End of chapter questions from M&R Chapters 3 and 4. Professor Arvan supplied discussion question about restructuring.
Sept 24 – M&R Chapter 5 on bounded rationality, adverse selection, signaling and screening. For those who haven’t seen an economic model of private information, this is a critical chapter. B&D Chapter 5, Organizing Groups and Teams
September 26 – HW #2. End of chapter questions from M&R Chapter 5. Professor Arvan supplied discussion question about groups and teams.
Oct 1– M&R Chapter 6 on Moral Hazard. As with the previous chapter, this one is critical to understand as it relates incentives to behavior, a theme that is crucial in the rest of the book. B&D Chapter 6, People and Organizations. The moral hazard approach to employment relations encourages an adversarial view between employees and management. Need that be the case? M&R gets to this question a few chapters later.
Oct 3 – HW #3. End of chapter questions from M&R Chapter 6. Professor Arvan supplied discussion question about people and organizations.
Oct 8 – M&R Chapter 7 on Risk Sharing and Incentive Contracts. This is really a continuation of the issues brought up in chapter 6 but with an emphasis of performance based remuneration. B&D Chapter 7 on Improving Human Resource Management
Oct 10 – HW #4. End of chapter questions from M&R Chapter 7. Professor Arvan supplied discussion question about Human Resource Management.
Oct 15 – Practice Exam Review
Oct 17 – Midterm #1
Oct 22 – M&R Chapter 8 on Rents and Efficiency. B&D Chapter 8 on Interpersonal and Group Dynamics.
Oct 24 – HW #5. End of chapter questions from M&R Chapter 8. Professor Arvan supplied discussion question about Group Dynamics.
Oct 29 – M&R Chapter 9 on Ownership and Property Rights. B&D Chapter 9 on Power, Conflict, and Coalition.
Oct 31 – HW #6. End of chapter questions from M&R Chapter 9. Professor Arvan supplied discussion question about Conflict and Coalition.
Nov 5 – M&R Chapter 10 on Employment Policy and Human Resource Management. B&D Chapter 10 on The Manager as Politician.
Nov 7– HW #7. End of chapter questions from M&R Chapter 10. Professor Arvan supplied discussion question about The Manager as Politician.
Nov 12 – M&R Chapters 11 and 12 on Internal Labor Markets, Compensation, and Motivation. B&D Chapter 11 on Organizations as Political Arenas and Political Agents.
Nov 14 – HW #8. End of chapter questions from M&R Chapters 11 and 12. Professor Arvan supplied discussion question about Political Arenas.
Nov 19 – Thanksgiving Break.
Nov 21 – Thanks giving Break
Nov 26 – Practice Exam Review
Nov 28 – Midterm #2
Dec 3 – M&R Chapter 13 on Executive and Managerial Compensation. B&D Chapter 12 on Organizations, Symbols, and Culture.
Dec 5 – HW #9. End of chapter questions from M&R Chapter 13. Professor Arvan supplied discussion question about Organizations and Culture.
Dec 10 – M&R Chapter 16 on The Boundaries of the Firm and Chapter 17 on The Evolution of Economic Systems. B&D Chapters 13 and 14 on Culture in Action and Organization as Theater.
Dec 12 – Practice Exam Review
Dec 18 – Final Exam
Professor Arvan
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