Sharon Gifford received her Ph.D. in Economics at New York University in 1989. Prof. Gifford is currently an Associate Professor of Economics at Rutgers University. She teaches Managerial Economics in the MBA and PhD programs at the Graduate School of Management on both the Newark and New Brunswick campuses. She also teaches an elective course on the Economics of Organizations.

Professor Gifford’s research is concerned with the implications of limited attention. She has published numerous articles in professional journals such as The RAND Journal of Economics, Economic Theory, Journal of Economic Behavior and Organization, The Journal of Law, Economics and Organizations, Small Business Economics, The Journal of Business Venturing and The Journal of Economics and Management Strategy. She has developed a model of the optimal allocation of limited attention among current projects and evaluating potential new projects. Her research has applied her model of limited attention to issues concerning the innovation and growth of firms, career choice, incomplete contracts, transaction costs, venture capital, principal-agent models, efficiency wages and information processing. She has written a book for Kluwer Publishers that brings together these various applications to demonstrate the power of this line of research.

Professor Gifford may be contacted at sgifford@andromeda.rutgers.edu or by mail at Faculty of Management, Rutgers University, 180 University Avenue, Newark, NJ, 07102. Her phone number is (973) 353-1646 and FAX: (973) 353-1233.

Prof. Gifford's personal interests include Dressage and drawing. Click here for her pastel drawing of her horse, Hodja.

TEACHING

Research

BOOK

The Allocation of Limited Entrepreneurial Attention, Kluwer Academic Publishers, 1998.

For more information click here.

The problem of allocating limited attention appears in many economic settings. Organization theorists have long recognized this problem within organizations and have described it as a problem of the "span of control". Economists have recognized that decisions may take time and have modeled the problem of allocating limited time among a given number of activities. However, no previous economic model has recognized the fact that acquiring activities in the first place requires time and that this time has an opportunity cost as well. Including this activity of acquiring new activities to the alternative targets of attention results in previously unseen conclusions in the various economic problems to which the model has been applied.

For example, firm size and monopoly profits play a role in the innovative activity of a firm only if the firm conducts product improvement as well as new product innovation. In choosing a career, an individual may have insufficient entrepreneurial abilities to succeed as an innovative entrepreneur, but still find a career as a managerial entrepreneur more profitable than a career as a salaried manager. This provides a rationale for small owner-managed firms as an alternative form of entrepreneurial career.

In the literature on contracts, contract incompleteness has been treated as a given characteristic of many market transactions, due to given transaction costs. However, the optimal allocation of attention between writing new contracts with new employees and supervising contracts with current employees implies that contracts are optimally incomplete due to endogenous transaction costs resulting from limited attention. The optimal completeness of internal contracts is less than that of market contracts because internal contracts can be directed in the future as contingencies arise. In addition, the completeness of internal contracts is decreasing in the ability to direct the contract in the future and is increasing in the ability to write new contracts. This last result is counter intuitive because writing a new contract is the opportunity cost of making a contract more complete. The result stems from the fact that more complete internal contracts require less frequent direction in the future and so free up time for writing new contracts, which have a high probability of success.

This line of research continues by showing that internalizing transactions is optimal if the internal governance power of firms is sufficiently high relative to the governance power of the price system. This formalizes a main argument in the descriptive literature on transaction costs. However, the model also generates the counter-intuitive result that the upper bound on firm size (number of internal transactions) is increasing in the governance power of markets and decreasing in the governance power of hierarchies. The reason for this result is that internalizing a transaction requires one more market transaction and high internal governance power increases the opportunity cost of internalizing more transactions.

Contrary to the beliefs in the descriptive literature on the relationship between the venture capitalist and the entrepreneur, the model of limited attention shows that the venture capitalist does not have the incentives necessary to maximize the entrepreneur's share of the value of the venture. The venture capitalist provides fewer and less frequent meetings with the entrepreneur than is desired by the entrepreneur because of the opportunity cost of the venture capitalist's time. A similar relationship exists between the general partner of a venture capital fund and its limited partners. However, in both cases, the venture capitalist's allocation of attention is efficient.

These relationships are examples of the principal-agent relationship. As with the standard principal-agent model, a more model of the principal-agent relationship with limited attention results in moral hazard in relationships which the agent does not own. That is, the agent does not maximize the principal's wealth. However, contrary to the standard model, this moral hazard is efficient. Also contrary to the standard model, there is no moral hazard when the agent chooses to work for a single principal. The one principal receives all of the agent's attention and this allocation of attention is efficient.

The consensus in the literature on efficiency wages is that some type of monitoring costs are required to have wages which are greater than the market clearing wage and so result in equilibrium unemployment. However, up to now these monitoring costs have been treated as exogenous to the model. The model of limited attention can derive the endogenous monitoring costs needed to explain the existence of efficiency wages and the resulting equilibrium unemployment. The model can also derive the optimal monitoring intensity, performance standard, and efficiency wage.

The idea of limited attention generating monitoring costs is extended in two finance applications of the model. In commodities markets, many potential traders, such as growers of crops who would like to hedge their long positions, are faced with the problem of diverting attention away from their farming activities in order to monitor futures market prices. This cost of trading results in bias between the futures price and the expected spot price. Another finance issue to which the analysis of limited attention is applied is the optimal monitoring of bank loans by loan managers who can also evaluate and write new loans. The decision of allocating loan managers' time between "prospecting" for new loans and monitoring current ones is a critical issue in banking today.

Finally, a generalized version of the basic model of limited entrepreneurial attention generates various forms of bounded rationality behavior. In the basic model and all its applications, there is never more than one current project at any one time which warrants diverting attention from new projects. Thus, there is no possibility of congestion or overload. By making the state of each current project stochastic, the general model allows for several current projects to warrant attention at the same time. The issue then arises of which of these projects to attend to first and what to do with the others in the mean time. This is interpreted as congestion or overload. However, this very complex problem has a fairly simple solution, or optimal policy, and the various forms of the optimal policy are similar to common behavioral rules, such as "conservative thermostat", "putting out fires", and "staying with a winner", espoused by behavioral economic theories of bounded rationality.

Thus, this book deals with the implications of allocating limited entrepreneurial attention among activities or projects. Attention is limited in that a decision maker can pay attention to only one thing at a time. Attention is entrepreneurial in that it may be allocated to evaluating a potential new project for possible adoption. However, the outcome of the allocation of attention is not certain. A current project may or may not be improved with attention and a new project may or may not be promising. Thus, the number of projects among which attention can be allocated is stochastic and the maximum number of projects is endogenously determined by the optimal allocation of attention. The model of the allocation of limited attention is applied to a number of economic problems. Most of these topics have been given rigorous treatment in articles published in refereed journals, including the RAND Journal of Economics, Economic Theory, Journal of Economic Behavior and Organization, Journal of Economics and Management Strategy, Journal of Business Venturing and Small Business Economics.

Entrepreneurial Attention

"A Model of Project Evaluation With Limited Attention," with Charles Wilson, Economic Theory 5 (1995), 67-78.

"Allocation of Entrepreneurial Attention," Journal of Economic Behavior and Organization 19 (1992), 265-284.

By allocating attention to starting new activities, the entrepreneur may increase the demands on his or her attention by increasing the number of activities. Whether or not this occurs depends on whether efforts at supervision are sufficiently effective relative to efforts to start a new activity. If this is so, then the value of supervisory activities implies that some attention is allocated to maintaining current activities. Therefore, the number of activities is endogenously determined by the optimal allocation of attention between starting new activities and supervising current activities.

These two abilities of the entrepreneur, starting new activities and supervising current activities, are critical to the optimal behavior of the entrepreneur and the number of activities that are undertaken. Notice that, although rationality is bounded, in that the entrepreneur can attend to one activity, or a finite number of activities, at a time, the goal of the analysis is to determine the optimal allocation of this resource. No behavioral rules are assumed to be followed. In addition, the entrepreneur’s abilities themselves may be perfect. The only limitation on the entrepreneur’s decision-making ability or information processing is the limits on attention.

An interesting outcome of this analysis is that common behavioral rules are proven to be optimal. The optimal rules are dependent on the entrepreneur’s abilities to start new activities and to supervise current activities. These rules are essentially of two types: 1) an evaluations rule and 2) a discard rule. If the ability to start new activities is sufficiently low relative to the ability to supervise current activities, then the optimal rule is the evaluation rule, which prescribes that the entrepreneur evaluate each current activity periodically and evaluate a new activity only when not evaluating a current activity.

If, however, the ability to start new activities is sufficiently high relative to the ability to supervise current activities, then the optimal rule is the discard rule, which specifies that the entrepreneur evaluate a new activity every period and discard each current activity after a critical number of periods.

To get an intuitive feel for how the model works, it is helpful to think of the following analogy. Imagine a juggler on the "Ed Sullivan Show" who is rewarded according to the number of plates she can spin on the tips of long sticks on a table. The plates are the targets of attention and the juggler allocates limited attention between respinning old plates and setting up new plates. Assume that there is an unlimited supply of plates and sticks (and table top). As soon as one plate is spinning, she can set up another one. However, as she continues to set up additional spinning plates, the first one starts to wobble, threatening to fall.

The choice the juggler faces is to either continue to set up new plates or to go back and try to respin old plates. The best course of action depends on two characteristics of these plates: their balance and their tendency to break if dropped. A balanced plate is easy to set spinning while an unbalanced plate cannot be spun successfully. Only a fraction of new plates, however, are balanced and spin successfully. The probability that a new plate is balanced affects the expected value of trying to spin a new plate. Plates that have already been spun successfully are balanced and so can be easily respun. However, plates that have fallen may be cracked or even broken and no longer spinnable. The tendency of plates to break affects the expected value of trying to respin old plates. If plates break easily then the expected value of trying to respin old plates is low.

It turns out that there are two optimal plans of action. One is to continue to set up new plates and let the old ones fall and be freely discarded. This is optimal if most new plates are balanced and the breakage rate is high. The other alternative is to respin each old plate periodically and then try to set up a new plate when not respinning an old plate. This is the best course of action if few new plates are balanced and old plates do not easily crack or break. This reflects Kirzner's concept of entrepreneurial alertness. An entrepreneur who already has many activities (plates) to which to attend will not be alert to new opportunities because all attention is focused on current activities.

Innovation and Firm Growth

"Innovation, Firm Size and Growth in a Centralized Organization," The RAND Journal of Economics 23 (1992), 284-298.

"Innovation of Entrepreneurial Firms," with Zoltan Acs, Small Business Economics 8, (1996), 203-218.

In Gifford (1992a) the model of limited entrepreneurial attention is applied to the problem of how a firm innovates new products and improves current products. The main implication of the analysis of limited entrepreneurial attention is that entrepreneurial resources (attention) have an opportunity cost which is endogenously determined by the allocation of that attention. When the opportunity costs of entrepreneurial resources are treated this way, we find several startling results.

Limited entrepreneurial attention implies that firm size is bounded away from a larger firm size, which would be more profitable if attained instantaneously. Also, new product innovation by the entrepreneur depends on firm size and monopoly profits only if some attention is allocated to improving the profitability of current products. This implies that the Schumperian hypothesis of the relationship between innovation, on the one hand, and firm size and monopoly profits, on the other, depends itself on what I call the degree of obsolescence.

In addition to the dependence of firm size on monopoly profits, the model also implies that, if current product lines are periodically improved, then the maximum firm size is bounded below a larger firm size that would be more profitable if it could be attained instantaneously. Thus the costs of firm growth implied by limited attention have significant implications for firm size.

Career Choice

"Heterogeneous Ability, Career Choice and Firm Size," Small Business Economics 5 (1993), 249-259.

Gifford (1993) applies the model to the problem of the individual's choice of career between being an innovative entrepreneur, a managerial entrepreneur or a salaried employee. This choice will depend upon two characteristics of the individual: innovative ability and managerial ability. Innovative ability is the ability to recognize a new profit opportunity once attention has been focused on it. Managerial ability determines the entrepreneur's ability to manage the production of a product line once it has been introduced. A career as an innovative entrepreneur implies constant innovation while a managerial entrepreneur also allocates attention to managing current operations.

A career as an innovative entrepreneur is best if innovative ability is high and managerial ability is sufficiently low. A career as a managerial entrepreneur is optimal if managerial ability is high and innovative ability is low. This all appears perfectly obvious. However, as the wage rate of salaried employees rises, innovative entrepreneurs disappear but there will always be managerial entrepreneurs for any wage rate.

Contract Completeness

"Limited Attention and the Optimal Completeness of Contracts" Journal of Law, Economics, & Organizations 15 (1999), 468-486..

In Gifford (1998) limited attention is allocated between writing new contracts with other firms and writing and directing internal employment contracts. In the first case, the entrepreneur interviews and negotiates new contracts which are carried out by other firms while in the second case, the entrepreneur hires employees who carry out the contract but also are monitored by and receive direction from the entrepreneur. This monitoring and directing of employees diverts attention away from writing new contracts. There are two primary issues addressed by these papers: 1) which transactions should take place between firms (over markets) and which should take place within the firm, and 2) how much time should be spent writing these contracts, whether market or internal, in an effort to make them more complete.

Both the type of contract and its completeness are shown to depend upon the entrepreneur's abilities to find new trading partners and to direct internal contracts. The completeness of internal contracts is decreasing in the ability of the entrepreneur to direct the contract and increasing in the ability to find new trading partners. A higher ability to direct the employee as contingencies arise implies that they need not be included in the initial contract. A more complete internal contract receives less frequent direction and so allows the entrepreneur to allocate more attention to the search for new trading partners which has a high probability of success. Thus the opportunity cost of attending to current contracts implied by the probability of writing a new contract manifests itself in more complete internal contracts and a reduced frequency of attending to them.

Optimal internal contracts are found to be less complete than optimal long-term market transactions because contingencies can be dealt with as they arise. That is, market contracts take longer to write and are more complete, ex ante, than internal contracts. The intuition of this is that internal contracts can be less complete because they can be directed at future dates, whereas long-term market contracts are not directed at future dates and so more contingencies are included in the initial contract.

Endogenous Transaction Costs

"Endogenous Transaction Costs" under review at the Journal of Economic Behavior and Organization.

Download a pdf copy from Social Science Research Network

Limited entrepreneurial attention implies an endogenous opportunity cost of writing new contracts, which is embodied in the neglect of current internal contracts. Following Coase, internal contracts are those which are directed by the entrepreneur. Market transactions are those which are directed by markets. Under the optimal policy transactions are internalized only if the internal governance power of the firm is sufficiently strong for that transaction relative to the governance power of markets. Endogenous transaction costs are defined as the opportunity cost of attention allocated to writing a new contract, and are the gain from writing a new contract now while a current internal contract is neglected. The optimal policy implies that a new contract is written if and only if net transaction costs are negative.

Venture Capitalist Financing

"Limited Attention and the Role of the Venture Capitalist," Journal of Business Venturing 12, (1997), 459-482.

The applications above indicate that limited entrepreneurial attention can be found in many problems that are not traditional areas for entrepreneurship research. It can also be found in tradition entrepreneurship areas but in unusual ways. Although venture capital is a common concern for research in entrepreneurship, the problem is usually modeled with the entrepreneur as the agent of the venture capitalist. Gifford (1997) turns the relationship around and models the venture capitalist as an agent of the entrepreneur. The problem is analyzed by considering the allocation of a venture capitalist's limited attention between current ventures and acquiring new ventures.

The optimal allocation of the venture capitalist’s attention determines the optimal frequency of meetings with the entrepreneur and the optimal termination date at which the venture goes public. The opportunity cost of attending to an incubating venture is the foregone evaluation of new ventures. This opportunity cost implies that the venture capitalist wants to have fewer and less frequent consultations with the entrepreneur than is required to maximize the entrepreneur's return. This explains observation that "[t]he seemingly irrational act of shutting down an economically viable entity is rational when viewed from the perspective of the venture capitalist confronted with allocating time and capital among various projects" (Sahlman 1990, p. 507, footnote 12, emphasis added).

The most striking implication of this application is that the venture capitalist’s optimal allocation is socially efficient. Since the venture capitalist is exhibiting what is commonly called moral hazard, this implies that moral hazard is efficient.

Efficient Moral Hazard

"Efficient Moral Hazard" Journal of Economic Behavior and Organizations 40 (1999) 427-442.

The efficiency result of the allocation of a venture capitalist’s attention leads naturally to the consideration of the efficiency of the general model of allocating an agent’s limited attention among an endogenous number of principals. This model differs from the usual common agent models by letting the number of principals be determined within the model. The analysis shows that when an entrepreneur serves an endogenous number of clients the usual moral hazard result of the principal-agent relationship is observed. However, the entrepreneur’s allocation of attention is socially efficient. This is in contrast to the usual finding in principal-agent models that moral hazard is inefficient.

Bounded Rationality

"Limited Attention as the Bound to Rationality"

Bounded rationality has been held partially responsible for the existence of firms. Bounded rationality is modeled here as the result of a utility maximization problem with limited attention. The only restriction on rationality is that the agent can pay attention to only one thing at a time. Attention is allocated between adopting new behaviors, or solutions, for current problems, and adapting current behaviors to solve those problems. Using an infinite-horizon, discounted dynamic programming model, this paper derives the optimal allocation of attention. The optimal policy of this "meta-problem" is itself similar to common behavioral rules. Having established this optimal behavioral rule, the agent then chooses how much time to spend adopting each new behavior, which determines how close to substantively rational the behaviors are.

This paper makes an innocuous assumption: agents can pay attention to only one thing at a time. This is one assumption that most people can agree on, although some seem to think that they can safely drive a car and read a map at the same time. There are several possible variations of this assumption, such as doing two things at once, but neither as well as when all attention is focused on one task.

This paper presents a utility-maximizing model in which an agent may consider a potentially infinite number of behaviors to acquire to apply to potential problems. At each time, the agent can choose to adapt a current or can search for and adopt a new behavior. Any of the behavioral rules may actually be optimal. Thus, the model addresses the meta-problem of choosing among and adapting behavioral rules when the time spent making these decisions has a cost. This implies an opportunity cost to adopting a new behavior, where this cost is the value of improving a current behavior. Unlike other costly-computation models, these costs are endogenous. This analysis also considers the question of how much attention should be allocated to adopting each behavior and thus the optimality of the behavioral rules themselves.

This is the first effort to analyze Simon's suggestion above that attention should be treated as a scarce resource in models of bounded rationality. In fact, limited attention is the only bound on rationality assumed in this analysis. This is done in an effort to capture, within a dynamic programming model of utility maximization, the limitations suggested in Simon (1955).

TEACHING

Managerial Economic Analysis (MBA)

Course Description:

This course is designed to give you a working knowledge of the basic principles of microeconomic theory, with an emphasis on the applications of economics to management decision making. No prior economic training is assumed. Those with recent undergraduate degrees in economics are strongly encouraged to consider substituting an economics elective for this course.

Course Description:

Course Materials:

Textbook: Managerial Economics and Business Strategy, Fifth Edition, by Michael R. Baye (ISBN 0-07-298389-2), Irwin. The text and Study Guide may be available at the New Jersey and Rutgers Bookstore. However, I strongly recommend that you try to obtain the textbook and Study Guide online before class starts. The bookstores often run out if the book in the first week.

Class Notes: Blackboard https://blackboard.newark.rutgers.edu/ . You will need your Rutgers NetID to logon.

Prerequisite Topics

Calculus: differentiation of linear and power functions, graphing a function, maximizing an objective function.

Statistics: regression analysis, t-statistics, R².

Course Requirements

Your grade for the course will be based on two 1-hour in-class exams (15% each), two projects (15% each) and a final exam (30%). The final 10% is based on class participation. Participation credit is earned by being active in class (asking questions, answering questions, telling good jokes, etc.) You can also get participation credit by being active in the Discussion Board on Bb. This may include asking detailed questions, providing detailed answers to questions, or providing a news article with a brief description of the connection to the class.

The projects will be done in groups of up to 4 students. The first project is based on question 10 in chapter 3 of the textbook. Each group will use a different data set, available on the disk that accompanies the text, to run a regression and answer the questions in the text. Each group will hand in one report. The second project will be an industry analysis based on the industry of your choice. Each group will hand in one report.

Outline

Week 1	Managerial Economics and Market Forces	Ch. 1 and 2
Week 2	Demand	Ch. 3
Week 3	Individual Behavior	Ch. 4
Week 4	1 hour exam. Chapters 1-4 Production and Costs (project 1 due)	Ch. 5
Week 5	Organization of the Firm	Ch. 6
Week 6	Nature of Industry	Ch. 7
Week 7	1 hour exam. Chapters 5-7 Managing Markets	Ch. 8
Week 8	Rivalry	Ch. 9
Week 9	Game Theory	Ch. 10
Week 10	Pricing Strategy	Ch. 11
Week 11	Economics of Information	Ch. 12
Week 12	Government in the Marketplace (project 2 due)	Ch. 14
Week 13	Review
Final Exam	3 hour Exam Chapters 8-12 and 14

To prepare for class and the exams, read the assigned chapter(s) before class. Download and print the transparencies and class summaries. Go through the study guide either before or soon after class to test your understanding of the material. There are sample exams on Blackboard. Start working on the projects as soon as the material is assigned. Post your question on the Discussion Board on Bb (credit for well-posed questions as well as answers).

Microeconomic Theory (Ph.D)

TEXT: Microeconomic Theory, Andreu Mas-Colell, et al., Oxford University Press, New York (1995, only edition). A supplementary text is Microeconomic Theory, by Walter Nicholson, Dryden Press (8^th or 9^th edition). This book comes with a useful study guide. These books have been ordered by the bookstores, but you are encouraged to obtain the books on line ahead of class. In addition, you may want to purchase A Course in Microeconomic Theory by David M. Kreps, Princeton University Press.

CLASS NOTES AND TRANSPARENCIES: These can be downloaded and printed from Blackboard 6.

GRADE: 2 Midterm exams 20% each, Final exam 40%, Class Participation 20%.

EXAMS: Exams will be problem solving and short essay. There will be sample exams on Bb with solutions.

CLASS PARTICIPATION: Attendance will be taken each meeting. Each student will be required to present a problem assignment and explain it to the class. Contributions to class discussion will also be counted towards the class participation grade. In addition, there is a discussion board on Blackboard. Contributions to questions (detailed) or answers count toward participation.

SUGGESTIONS FOR STUDYING: Read the chapter assigned in Mas-Colell before class, even if you don’t understand it. You will be better prepared to ask questions. Use the other textbooks as supplementary reading on the same topics. Nicholson provides a simpler exposition and useful practice problems, with solutions, in each chapter and a mathematical methods review in Chapter 1. Kreps provides a more intuitive approach to each topic.

FURTHER READING: Fundamental Ideas of Analysis and How to Read and Do Proofs: An Introduction to Mathematical Thought Processes, Michael C. Reed and Daniel Solow.

ISBN: 0-471-31415-3 Price: $86.95 (for the set of two books)

John Wiley & Sons, Inc.,Distribution Center, 1 Wiley Drive, Somerset, NJ 08875-1272

732-469-4400 (toll free): (800) 225-5945 Fax: 732-302-2300, Email: catalog@wiley.com

COURSE OUTLINE

Week 1	Preferences and Choice Ch. 1
Week 2	Consumer Choice Ch. 2
Week 3	Classical Demand Theory Ch.3
Week 4	Classical Demand Theory Ch. 3
Week 5	Midterm Exam 1 (one hour) Aggregate Demand Ch. 4
Week 6	Production Ch. 5
Week 7	Choice Under Uncertainty Ch. 6
Week 8	Competitive Markets Ch. 10
Week 9	Competitive Markets Ch. 10
Week 10	Midterm Exam 2 (one hour) Market Power Ch. 12
Week 11	Adverse Selection Ch 13
Week 12	The Principal-Agent Problem Ch 14
Week 13	Review
Week 14	Final Exam

MANAGERIAL INCENTIVES AND MOTIVATION

This course looks at the inner workings of the firm by considering the structure of decision-making and incentives. Many economic theories of the internal organization of firms have been derived by leading economists in the last twenty years. The theories concern the allocation of decision rights (including who gets to be the boss), how performance is monitored and measured (including who monitors the monitor) and how performance is rewarded (including stock options, incentive pay, admission of one’s children into the most prestigious nursery school.)

Textbook: Managerial Economics and Organizational Architecture, by Brickley, Smith and Zimmerman, McGraw-Hill/Irwin.

Reader: Firms, Organizations and Contracts: A Reader in Industrial Organization, edited by Peter Buckley and Jonathan Michie, Oxford University Press.

Class Notes: Each week class summaries and the PowerPoint slides for the class can be downloaded from Blackboard.

Assignments: The assignments are short weekly essays on the readings and contributions to class discussions. They must be submitted to the drop box by 10pm on the Monday before class. The purpose of these essays is to help you make a contribution to class discussion. For MBA students, choose one of the following approaches:

1. How is the reading material related to your business experience?

2. How is it related to current or past business news?

3. What did you find surprising and how did it change your thinking?

4. What part of the reading do you disagree with and why?

For PhD students, the essay should relate the reading other theories in the management literature?

The assignment for the first class is to read two of my papers and submit your essay to the drop box on Bb on the Monday before the second class. For the second class, read the Kaldor article. And so on. I will choose an excerpt from each essay and ask each student to expand upon this excerpt in class. The rest of the class can then respond to each student’s contribution. The essays can be revised before they are made available to the class on Bb after the class in which they are discussed.

Final Essay: Each student will submit a 10-15 page final paper on the Monday before the final class. The final paper must integrate at least five of the various topics covered in the course. A one page proposal must be submitted one week before the paper is due. In the final class, each student will discuss their final paper. For MBA students, this final paper may use any or all of the four suggestions for the weekly essays. However, for PhD students, the final paper must be based on relevant journal articles, including any not included in the syllabus.

Grading: Your grade for the course will be based on the following percentages:

Weekly Essays 30%

Class Contribution 30%

Final Essay 40%

Course Outline

Assigned Reading

(location: Bb = Blackboard, FOC = Firms, Organizations and Contracts)

Chapter in Textbook

Gifford, "Allocation of Entrepreneurial Attention" (Bb)

Gifford, "The Economics of Limited Entrepreneurial Attention” (Bb)

Read both papers and write a one page comment.

Markets, Organizations, and the Role of Knowledge

Kaldor,“The Equilibrium of the Firm” (Ch. 1, FOC)

Ch 1 and 3

Incentives and Contracts

Hart "An Economist's Perspective on the Theory of the Firm" (Ch. 7, FOC)

Ch. 10

Organizational Architecture

Jensen and Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure” (Ch. 5, FOC)

Ch. 11

Decision Rights and Empowerment

Jensen and Meckling, “Specific and General Knowledge, and Organizational Structure” (Bb)

Ch. 12

Jobs and Subunits

Ouchi, ”Markets, Bureaucracies and Clans” (Ch. 17, FOC)

Ch. 13

Attracting Employees

Lazear, “Labor Economics and the Psychology of Organizations” (Bb)

Ch. 14

Incentive Compensation

Baker, Jensen and Murphy “Compensation and Incentives: Practice versus Theory" (Bb)

Ch. 15

Performance Evaluation

Alchian and Demsetz, “Production, Information Costs and Economic Organization" (Ch. 4, FOC)

Ch. 16

Divisional Performance Evaluation

Gibbons and Murphy “Relative Performance Evaluation for Chief Executive Officers”. (Bb)

Ch. 17

Vertical Integration and Outsourcing

Klein, Crawford and Alchian, “Vertical Integration, Appropriable Rents, and the Competitive Contracting Process” (Bb)

Ch. 19

Gifford, “Limited Attention and the Optimal Completeness of Contracts” (Bb) or

Gifford, “Make or Buy: Endogenous Transaction Costs” (Bb).

Read one of the two papers and write a one page comment or question relating the paper to the other course content.

Gifford, “Efficient Moral Hazard” (Bb) or

Gifford, “Limited Attention as the Bound on Rationality” (Bb)

Read one of the two papers and write a one page comment or question relating the paper to the other course content.

Paper presentations (15 min. to present, 5 min. for class discussion)

Bibliography

Alchian, A. and H. Demsetz (1972) “Production, Information Costs and Economic Organization,” American Economic Review 62, 777-795.

Baker, Jensen and Murphy (1988) “Compensation and Incentives: Practice versus Theory,” Journal of Finance 43: 593-616.

Gifford, S., 1992, “Allocation of Entrepreneurial Attention," Journal of Economic Behavior and Organization 19 (1992), 265-284.

Gifford, S., 1999, “The Economics of Limited Entrepreneurial Attention” in New Evidence on Entrepreneurship and its Impact on Economic Performance, edited by Gary Libecap, JAI Press Series – Advances in the Study of Entrepreneurship, Innovation, and Economic Growth, 1999.

Hart, Oliver (1989) "An Economist's Perspective on the Theory of the Firm" Columbia Law Review 89, 1757-1774.

Hart, Oliver and John Moore, 1990, "Property Rights and the Nature of the Firm," Journal of Political Economy 98, 1119-1158.

Hayek, F. von, 1945, “The Use of Knowledge in Society” American Economic Review 35, 519-530.

Holmstrom, Bengt and Jean Tirole (1991) "Transfer Pricing and Organizational Form," Journal of Law, Economics and Organizations 7, 201-228.

Jensen, M. C., 1983, “Organization Theory and Methodology,” The Accounting Review 58, 319-339.

Jensen, M. C. and W. H. Meckling, 1976, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,” Journal of Financial Economics 3, 305-360.

Jensen, M. C. and W. H. Meckling, 1995, “Specific and General Knowledge, and Organizational Structure,” Journal of Applied Corporate Finance 8, 4-18.

Klein, B., R. Crawford and A. Alchian, 1978, “Vertical Integration, Appropriable Rents, and the Competitive Contracting Process,” Journal of Law and Economics 24, 297-326.

Lazear, E. P., 1991, “Labor Economics and the Psychology of Organizations,” Journal of Economic Perspectives 5, 89-110.

Williamson, Oliver E., 1980, "The Organization of Work: A Comparative Institutional Assessment," Journal of Economic Behavior and Organization 1, 5-38.

Final Exam

3 hour Exam Chapters 8-12 and 14

Course Outline