Organizations and Markets

Athey on Organizational Complementarities

21 April 2007 at 3:48 pm Peter G. Klein 1 comment

| Peter Klein |

Harvard’s Susan Athey has won the John Bates Clark medal. Commentators are hailing her age (one of the youngest Clark medalists at 36), gender (the first female winner), and reputation (profiled in the New York Times as a 24-year-old PhD candidate). Here I’ll offer a few remarks about one of her most important papers for organizational scholars, “An Empirical Framework for Testing Theories About Complementarity in Organizational Design” (with Scott Stern). (An NBER version of the paper is here; as far as I know it is still unpublished.)

I blogged recently about complementarities among organizational form, technology, and market conditions. Athey and Stern’s paper tackles the problem of measuring complementarities among organizational practices. If particular practices occur in clusters (as modeled, for example, by Holmstrom and Milgrom, 1994), it is difficult to estimate the marginal impact of adopting any particular practice. Moreover, the endogeneity of the decision to adopt individual practices makes it difficult to judge whether practices are in fact complementary (i.e., performance enhancing). Athey and Stern develop a method for identifying complementarities by constructing “activity-specific instruments” that control for unobserved heterogeneity. The proposed approach, which jointly estimates the adoption decision and the productivity effect of organizational practices, is becoming increasingly influential in the empirical literature on organizational design.

The paper is fairly technical and does not include any actual empirical analysis (though a Google Scholar or SSRN search will turn up several empirical papers using Athey and Stern’s technique for identifying complementarities). Here is one passage that may have particular interest for O&M readers:

While most of our analysis has been centered on testing of complementarity, the model suggests a set of natural cross-equation restrictions regarding adoption behavior. Hypotheses about the nature of the adoption process are particularly salient since both economists and other social scientists often disagree about the nature of this process and its consequences for policy. At one extreme, neoclassical economics assumes that production decisions are chosen to maximize firm profits taking as given a vector of observable input prices. A variety of theories of transaction costs and adjustment costs have been incorporated into the literature over time, but the assumption in the economics literature is still that firms are doing as well as possible subject to constraints.

While there is substantial heterogeneity among economic theories, all of these theories differ sharply from the approach taken by some strands of the literature in sociology and organizational behavior. For example, organizational ecology (see Nelson and Winter (1982) or Hannan and Freeman (1989)) posits that firms change only slowly and not necessarily systematically; rather, a process of “selection” eliminates firms which are poorly adapted to the current environment. More generally, much of the organizational behavior literature takes the view that organizations should not be thought of as rational decision-makers. For example, the “garbage can” theory of organizations maintains that agents may be systematically misinformed about the costs and benefits of different practices within their own organization (Cohen, March, and Olsen, 1972).

Although the methods of economists and sociologists may differ, the empirical model that we develop is rich enough to allow for all of these possibilities.

Another example of organizational scholars working for interdisciplinary peace!

Update: Joshua Gans and David Warsh offer more comprehensive assessments of Athey’s contributions.

Entry filed under: - Klein -, Management Theory, Theory of the Firm.