Knowledge that Transforms

This paper develops a theory of the allocation of formal and real authority within organizations. Real authority is determined by the structure of information, which in turn depends on the allocation of formal authority. An increase in an agent's real authority promotes initiative but results in a loss of control for the principal. The paper analyzes the allocation of formal authority as well as some determinants of the subordinates' real authority: overload, lenient rules, urgency of decision, reputation, performance measurement, and multiplicity of superiors. Finally, the amount of communication in an organization is shown to depend on the allocation of formal authority. Copyright 1997 by the University of Chicago.

Economic development is typically accompanied by migration from rural to urban employment. This migration is often associated with significant urban underemployment. Both factors are important in the development process. We consider a neoclassical growth model with rural‐urban migration and urban underemployment, which arises from an adverse selection problem in labor markets. We demonstrate that rural‐urban migration and underemployment can be a source of development traps and can give rise to a large set of periodic equilibria display long periods of uninterrupted growth, punctuated by brief but severe recessions.

Market theorists assume that expected utility predicts preferences at the market level even as evidence mounts that it predicts poorly at the individual level. The arguments for better‐performing markets are grounded in the assumption that individuals respond to the competition of the market. The objective of this study is to test empirically the validity of those assumptions using the betweenness property of expected utility. I conclude that expected utility does indeed predict better in markets, but analyses suggest that improved performance may be due to the statistical role played by markets introduced by market price selection rules.

It is well known that comparative performance information can enhance efficiency in static principal-agent relationships by improving the trade-off between insurance and incentives in the design of explicit contracts. In dynamic settings, however, there may be implicit as well as explicit incentives, for example, managerial career concerns and the ratchet effects in regulation. The authors show that the dynamic effects of comparative performance information on implicit incentives can either reinforce or oppose the familiar (static) insurance effect and in either case can be more important for efficiency. The overall welfare effects of comparative performance information are thus ambiguous and can be characterized in terms of the underlying information structure. Copyright 1997 by the University of Chicago.

This paper offers a theory of development that links the degree of market incompleteness to capital accumulation and growth. At early stages of development, the presence projects limits the degree of risk spreading (diversification) that the economy can achieve. The desire to avoid highly risky investments slows down capital accumulation, and the inability to diversify idiosyncratic risk introduces a large amount of uncertainty in the growth process. The typical development pattern will consist of a lengthy period of “primitive accumulation” with highly variable output, followed by takeoff and financial deepening and, finally, steady growth. “Lucky” countries will spend relatively less time in the primitive accumulation stage and develop faster. Although all agents are price takers and there are no technological spillovers, the decentralized equilibrium is inefficient because individuals do not take into account their impact on others' diversification opportunities. We also show that our results generalize to economies with international capital flows.

The relationship between Milton Friedman's monetary economics and the views espoused by Chicago and non-Chicago quantity theorists during the years 1930-36 is examined. Contrary to recent interpretations, Chicago economists advanced the efficacy of monetary policy as the means of escaping from the Great Depression, provided that such a policy was implemented by the use of budget deficits to generate monetary expansion. The use of the quantity theory of money to provide a theoretical rationale for budget deficits distinguished the Chicago economists from other quantity theorists and left them less susceptible to the Keynesian revolution. The claim that Harvard was an important center for monetary research in the early 1930s is refuted.

In this paper, the author constructs an equilibrium for markets with frictions, which is competitive in the sense that all agents are price takers and maximize utility subject to a set of market parameters. He shows that the equilibrium can be achieved if employers with vacancies can advertise publicly the wages they pay. Copyright 1997 by the University of Chicago.

In this paper, I structurally estimate a stochastic bargaining model of government formation in a multiparty parliamentary democracy, and I conduct policy experiments to evaluate the effects of changes in the bargaining procedure. I show that the model fits well data on the duration of negotiations and government durations in postwar Italy. Also, I show that changes in the proposer selection process would not affect either the duration of negotiations or government durations, whereas the imposition of a strict deadline would in general reduce the incentives to delay agreement as well as government durations.

In the context of entry‐level labor markets, we consider the potential transactions that have to be evaluated before equilibrium transactions can be identified. These potential transactions involve offers that are rejected. After an initial phase in which many offers can be proffered in parallel, subsequent potential transactions must be processed serially, since a new offer cannot be made until an outstanding offer is rejected. In many, perhaps most, decentralized labor markets, this means that transactions have to be finalized before there is time for the market to clear, that is, before all the potential transactions that would need to be evaluated in order to reach a stable outcome can in fact be evaluated. This has implications for the strategic behavior of firms and workers. In particular, in deciding to whom to offer a position, a firm may have strong incentives to consider not only its preferences over workers but also the likelihood that its offer will be accepted, since if its offer is rejected it may find that many other potential employees have become unavailable in the interim. The analysis is carried out in connection with the decentralized

While it is widely believed by academics, politicians, and the popular press that incumbent members of Congress are rewarded by the electorate for bringing federal dollars to their district, the empirical evidence supporting that claim is extremely weak. One explanation for the failure to uncover the expected relationship between federal spending and election outcomes is that incumbents who expect to have difficulty being reelected are likely to exert greater effort in obtaining federal outlays. Since it is generally impossible to adequately measure this effort, the estimated impact of spending is biased downward because of an omitted variable bias. We address this estimation problem using instrumental variables. For each House district, we use spending outside the district but inside the state containing the district as an instrument for spending in the district. Federal spending is affected by a large number of actors (e.g., governors, senators, mayors, and other House members in the state delegation), leading to positive correlations in federal spending across the House districts within states. However, federal spending outside of a district is unlikely to be strongly correlated with the strength of that district's electoral challenge. In contrast to previous studies, we find strong evidence that federal spending benefits congressional incumbents: an additional $100 per capita in spending is worth as much as 2 percent of the popular vote. The only category of federal spending that does not appear to yield electoral rewards is direct transfers to individuals.