This paper studies the matching of opportunities with talent when costly diagnosis confers an informational advantage to the agent undertaking it. When this agent is underqualified, adverse selection prevents efficient referrals through fixed-price contracts. Spot-market contracts that rely on income sharing can match opportunities with talent but induce a team-production problem which, if severe enough, can prevent the referral of valuable opportunities. Partnership contracts, in which agents agree in advance to the allocation of opportunities and of the revenues they generate, support referrals where the market cannot, but often at the expense of distortions on those opportunities that are not referred.

Since the seminal work of Lawrence F. Katz and Kevin M. Murphy (1992), the study of wage inequality has taken as its starting point a neoclassical constant-elasticity-of-substitution production function using as inputs capital and lowand high-skill labor. This approach assumes that the organization of production is fixed and determined by a particular specification of technology, and it ignores both the source of the interaction between workers and the organizational aspects of this interaction. These shortcomings are particularly important in light of growing empirical evidence that points, first, to the importance of decreases in the cost of processing and communicating information and, second, to the complementarity between organizational change and adjustments in the distribution of wages (e.g., Timothy F. Bresnahan et al., 2002). This paper argues that theories that seek to guide empirical research on these areas must put knowledge and information at the center of the analysis of organizations and link the organizational structure with aggregate variables via equilibrium frameworks. In Garicano and Rossi-Hansberg (2003), we present a model of this kind. It determines the patterns of organization, as manifested by the communication and specialization patterns, and the implied wage structure, that result from different costs of acquiring and communicating information. Here, we present a simple variant of this theory that allows us to focus on one of the main aspects of that framework: the sorting of agents into teams and the wage and organizational structure that accompanies that sorting. We use this simple model to analyze the changes in organization and wages that result from a very specific type of technological change: a reduction in the cost of communicating knowledge or information. This model allows us to consider the effect on within-class wage inequality, and the impact of information technology on the creation and form of organizations (e.g., size distribution of hierarchies). However, because knowledge is exogenously given, and agents cannot invest in learning, an important margin of the model in Garicano and Rossi-Hansberg (2003) is fixed, namely, the degree of “decentralization” or the extent to which problems are solved at lower levels. That model allows the simultaneous study of the acquisition of knowledge, spans of control, and matching in equilibrium. Moreover, it goes beyond the current analysis in that it allows for organizations with an unconstrained number of layers, and in that it studies two aspects of the impact of information technology: communication technology (like here) and the technology to acquire knowledge or information (e.g., processing power through cheaper database access).

We show how size-contingent laws can be used to identify the equilibrium and welfare effects of labor regulation. Our framework incorporates such regulations into the Lucas (1978) model and applies this to France where many labor laws start to bind on firms with exactly 50 or more employees. Using data on the population of firms between 2002 and 2007 period, we structurally estimate the key parameters of our model to construct counterfactual size, productivity and welfare distributions. With flexible wages, the deadweight loss of the regulation is below 1% of GDP, but when wages are downwardly rigid welfare losses exceed 5%. We also show, regardless of wage flexibility, that the main losers from the regulation are workers (and to a lesser extent large firms) and the main winners are small firms.

We study how relational contracts mitigate Becker's classic problem of providing general human capital when training contracts are incomplete. The firm's profit-maximizing agreement is a multiperiod apprenticeship in which the novice is trained gradually over time and eventually receives all knowledge. The firm adopts a 1/e rule, whereby at the beginning of the relationship the novice is trained, for free, just enough to produce a fraction 1/e of the efficient output. After that, the novice earns all additional knowledge with labor. This rule causes inefficiently lengthy relationships that grow longer the more patient the players. A minimum wage is welfare enhancing.

Offshoring and Wage Inequality: Using Occupational Licensing as a Shifter of Offshoring Costs by Chiara Criscuolo and Luis Garicano. Published in volume 100, issue 2, pages 439-43 of American Economic Review, May 2010

We propose a simple model of the sovereign-bank diabolic loop, and establish four results. First, the diabolic loop can be avoided by restricting banks' domestic sovereign exposures relative to their equity. Second, equity requirements can be lowered if banks only hold senior domestic sovereign debt. Third, such requirements shrink even further if banks only hold the senior tranche of an internationally diversified sovereign portfolio--known as ESBies in the euro-area context. Finally, ESBies generate more safe assets than domestic debt tranching alone; and, insofar as the diabolic loop is defused, the junior tranche generated by the securitization is itself risk-free.