652 - Economics of Organization, Fall 2018

The success of a firm hinges critically on how well it is organized. Likewise, the prosperity of a nation
depends more on its institutional quality than on its physical resources. In this course, we want to
explain how people organize and fail to organize. What are the obstacles to cooperation? Here are
some of the themes, big and small.

 Why do people sometimes fight instead of talking?

 Why does talking sometimes fail to produce agreement?
 How are agreements enforced?
 When are agreements trusted?
 What does leadership mean?
 What does it take to change an organization or society itself?
 How does an optimal incentive scheme look?
 How can we explain the managerial contracts that we observe?
 When contracts are incomplete, how should we allocate decision rights?
 Do people have social preferences, and does it matter?

The aim of the course is that students should be able to use game theoretic reasoning and the
modern theory of incentives to identify obstacles to cooperation and to understand how social
organization emerges and may be designed to facilitate cooperation.
The course can be seen as an extension of basic microeconomic theory, but focuses on problems
that receive little attention in typical microeconomics courses. It provides knowledge that is useful for
further study in economics, management, finance, and accounting. At the same time it helps
analytically oriented students to think systematically about many practical problems.
A student who has participated in this course is better prepared to work as decision maker
(entrepreneur, leader, politician) or academic.
The course is also particularly beneficial for those intending to take additional courses in
microeconomics, corporate finance, organization theory, or political science.

Intended Learning Outcomes

At the end of the course, students should be able to:

1. Explain the principles of game theory and analyze behavior in games.

2. Apply game theoretic reasoning to specific problems. Especially, students should be able to
use the game theoretic language to analyze the institutions that we observe and how they
affect economic outcomes.

Format & Structure

The course consists of a series of fifteen lectures given by a single professor. The lectures include
substantial interaction, sometimes in the form of mock experiments. Attendance is not compulsory.

Prerequisites
All students must have passed the exam in microeconomics (or an equivalent course)

Required reading
L. Babcock and G. Loewenstein (1997): Explaining Bargaining Impasse: The Role of Self-
Serving Biases, Journal of Economic Perspectives 11 (1), 109-126.
S. Basu et al (2009): Recordkeeping Alters Economic History by Promoting
Reciprocity, PNAS 106 (4), 1009-1014.
N. Bloom and J. Van Reenen (2010): Why Do Management Practices Differ Across Firms and
Countries? Journal of Economic Perspectives24 (Winter), 203-224.
M.S. Chwe (2001): Rational Ritual: Culture, Coordination and Common Knowledge, Princeton:
Princeton University Press. (Chapter 1).
P. Joskow (1987): Contract Duration and Relationship-Specific Investments: Empirical Evidence
from Coal Markets, American Economic Review 77, 168-185.
R. Levine (2005): Law, Endowments and Property Rights, Journal of Economic Perspectives 19
(3), 61-88.
G.D. Libecap and S.N. Wiggins (1984): Contractual Responses to the Common Pool:
Prorationing of Crude Oil Production, American Economic Review 74, 87-98.
J. Mokyr (2013): Cultural Entrepreneurs and the Origins of Modern Economic
Growth, Scandinavian Economic History Review 61 (1), 1-33.
E. Ostrom (2000): Collective Action and the Evolution of Social Norms, Journal of Economic
Perspectives 14 (3), 137-158.
T. Schelling (1956): An Essay on Bargaining, American Economic Review 46, 281-306.
J. Tirole (2001): Corporate Governance, Econometrica 69, 1-35.