End of Semester Reflection

When I first registered for this course at the end of the Spring 2014 semester, I really was not sure what to expect. The title, Economics of Organizations, gave me a general sense, but the topic that came to mind was still very abstract. I thought to myself, "How exactly would an economist look at organizations anyway? Maybe this class is about management skills? Are there even any models out there to describe how an organization works?"

A few months later I found myself sitting in Professor Arvan's class with a small group of fellow students. Although eager to satisfy my curiosity regarding the course, I was still uncertain of the material itself and how the class would run after the first class. As the course progressed, however, I started realize that our efforts were aimed at using the lens of microeconomic analysis to understand how organizations behave. After the first few weeks I found myself falling into a strangely natural rhythm: A blog post to introduce an idea before the weekend, a class discussion, a math-based Excel homework, and then another discussion. This format was new to me, and it was by far the most intimate economics class I have taken here at the U of I. However, I found that over time the structure of the course did very well to present me with a challenging idea and then allow me to gradually refine my understanding through both mathematical and conceptual channels. The blog post would get me thinking. Sometimes the ambiguity in the response requirements pushed me to frustration over what exactly the professor was looking for... But that was ok. Even if I struggled with the core idea initially, I knew I could count on the upcoming class session to clarify the subject with a tactfully guided discussion. Once an idea was introduced and we had taken some to time to familiarize ourselves with it conceptually, the real analysis could begin in the Excel homework. I certainly struggled with some of these, but I found that the Excel homeworks were just like the blog posts. Working through the guided problems would progressively construct the model in my mind using familiar microeconomic tools, but present just enough of a challenge to make me reach to understand the mechanisms involved. Even if I wasn't able to figure every question out, I knew that the next day Professor Arvan would not only clarify the math involved, but also provide enriching connections and applications to real-life situations.

Now, as we approach the end of the semester, I find myself with a very different perspective of organizational behavior. Before I had never really thought about why a team or company behaved a certain way or made a particular decision. If I did, I would simply dismiss it as a result of bureaucratic action only understood by the individuals involved. This course took the knowledge of economics I have built up to this point and equipped me with the mentality and tools to apply them not only to organizations, but also to myself. Hopefully, as I continue into my future and try to navigate through organizations big and small, what I have internalized throughout the duration of this course will allow me to not only adapt, but to thrive.

Reputation

In economic transactions, and especially in organizational settings, reputation is a very important concern. This is especially true when considering transactions that can unfold over a long duration of time, leading to an uncertain outcome in the future. Recalling our earlier class discussions of the principal-agent model, asymmetric information, and organizational politics, it is clear that how economic agents perceive one another has a tangible affect on the result of their interactions. One's reputation can be either serve as a powerful tool in exercising organizational influence, or it can be a hindering scar that closes doors.

Instead of using an example from my own experience, I want to share what I was told by a University of Illinois Economics Alumni whom I interviewed a couple months ago. This alum graduated with a bachelor's degree in economics in 1998. After working as a proprietary options trader for Bank of America in the 90's and 2000's, the economic crisis of 2008 prompted his return to school in order to earn an MBA and ultimately transitioning him to being a private financial consultant for Fifth-Tird bank. The interview was conducted for a career preparation course, and my questions reflected that end. I asked about how his education translated into working skills, and I asked what he would say if he had the chance to share his wisdom with his younger self from decades ago. Much of the advice he offered was fairly straightforward and didn't differ much from what any career counselor would say, but something that really impacted me was how much emphasis he put on maintaining a strong reputation and continuous networking efforts. He told me that the "traditional" career path and retirement plan are obsolete for today's economy. He stated, "Most people can't do that anymore - finish college, find a job with a stable company, and work up that company until they can retire on the the three-legged stool of a pension, social security, and mortgage equity." Instead, he adamantly informed me that nowadays people bounce around, and that they must be mobile in order to keep their career going. For this reason, he found that the single most valuable gem of advice he had been able to crystalize throughout the progression of his career was reputation. "HR people speak a whole different language, but always stay networking. Work hard to earn the trust of your managers, coworkers, and clients, and make sure to always maintain your professional reputation."

This alumni, whose career path is not entirely dissimilar from my desired path, really shocked me. Of all the things he could have told me and throughout our discussions of economics, Illinois, and potential careers for economics majors, the core lesson he wanted to convey was about something that seemed so benign. I have yet to work in a professional setting in which my reputation could mean the difference between success and failure, support and rejection. However, it is clear that one's reputation has a lot more power than I had previously thought.

An Agent with Multiple Principals

I can't quite think of an example in my life in which I have acted as the agent of two distinct principals, so I am just going to present a hypothetical situation. In my mind, I see doctors who work for large hospital systems and facing such a dilemma. On one side, they are in fact medical doctors who have sworn to uphold an ethical guiding code for all patients they treat. In this sense doctors are bound as agents of their patients who must uphold the interests of the patient above all outside interests. On the other side, such doctors are also employees of a private organization. As such, they are also agents acting on behalf of the hospital as a whole and must answer to managers and board members. This creates an implicit conflict of interest, since what is best for the hospital in regards to its operations may not necessarily coincide with what is best for individual patients.

So, how can one resolve this issue stemming from the nature of dual principals? I personally do not think there is an easy answer to this, but in order to rectify these conflicting interests I believe that it is crucial to align the interests of the hospital with the interests of the patient. For example, if a radiology doctor knows that his department faces funding cuts if it continues to operate at its current level of profitability, he might be inclined to suggest more extensive and costly procedures for his patients. In order to avoid this dilemma, it is important to separate the mechanisms that govern hospital budgeting from those that affect treatment decisions. It is inevitable that in today's medical environment that doctors must work as part of a hospital or other agglomeration of healthcare services, and seeing as how many such institutions need to operate like a business, it is becoming increasingly difficult to protect the interests of patients. I do not have any first hand experience with healthcare management, however I can see a nearly infinite number of confounding factors such as pharmaceutical interests, insurance concerns, and career advancement. All of these contribute to the gap in the interests between patients and hospitals, forcing doctors to make difficult ethical decisions. Arguably, if it were possible to ensure that doctors would make the most ethical choice regardless of personal or monetary concerns, this would not be an issue. However, it is inevitable that doctors are presented with many conflicting interests and therefore the current system gives them all the power to weigh one principal against another.

Organizational Conflict

After reading through Bolman and Deal's chapter regarding interpersonal and group dynamics, I realized that many of the same themes that pervade mainstream management theory are present in their discussion of organizational conflict. They begin with a focus on interpersonal skills and interaction, and then go on to describe factors such as emotional intelligence, management style, and both formal and informal roles within an organizational hierarchy. While these are most certainly important determinants of a groups interaction norms, I find that the chapter does not do much to mention what I find is the greatest source of conflict in an organization: task interdependence.

As I mentioned in last week's post, I work at as a server in a restaurant in my home town over my summers off of school. Overall, I would say that the restaurant team - managers, servers, kitchen, and bus staff - generally experienced a functional and productive amount of conflict. Process disagreements and constructive input were always accepted and appreciated, however leadership was careful to ensure that conflict within the restaurant never got to a level where it interfered with the productivity and satisfaction of the employees or customers. Thankfully, interpersonal conflict such as arguments and personal disagreements were minimal and generally could be worked through. What made the level of organizational conflict functional at the restaurant was the centrality of task interdependence as the source of the conflict. Since each separate team must be both internally functional and externally functional with the other teams to provide service, everyone needed to perform their own tasks efficiently while simultaneously communicating with others. For example, when managers communicated with the staff, it was always relating to what a team or individual was doing and how they were doing it. 

A common source of conflict was slow service. If a manager noticed that a party had been seated for a long time without being served or if a customer raised a complaint, he or she would immediately set about rectifying the mistake by identifying the source of the conflict and consulting the parties involved. For slow service, it meant that either the server was too slow to address the table, get their order, and input it into the ordering system, or that the kitchen did not receive the order or that they had overlooked it in some way (either due to lack of attention or confusion from busy service). Once the source of the conflict was identified, the managers would go about rectifying it by first informing the dependent team of their overlooked table or order, then informing the team or person at fault of their mistake. Finally, they would speak with the customers so as to inform them of the service timing they could expect. This management method allowed for constructive criticism when one's service was less than spectacular while simultaneously addressing potential breakdowns of communication between the service and kitchen teams. Ultimately, this seemed (to me at least) like an effective way to manage the intergroup conflict that arose from task interdependence.

Team Gift Exchange

When it comes to teams, the core principle is that the team is greater than the sum of its parts. That is to say, the team as unit can produce outcomes more effectively, efficiently, and generally perform its designated function better than if the individual team members were to do so independently. This axiom must be true in order for a team to be beneficial to an organization, and it is important to examine the structure of the team to see how members are motivated and how they are rewarded for their effort and performance.

In class, we discussed Akerlof's gift exchange model of compensation in which he outlines the positives and negatives of pay for performance as opposed to gifts (i.e. promotions) in different organizational structures. As an alternative to the traditional wisdom of pay for performance, Akerlof argues that in many cases individuals and team members are better motivated to put forth their best work for an organization when their performance is detached from their direct compensation. The article "How to Get the Rich to Share the Marbles" expands upon this idea by examining how the initial conditions and division of labor within a team affect people's decision to share the rewards of their effort. The article discusses the surprising results of an experiment conducted to see whether children would be willing to self-redistribute marbles given different conditions but always with the same work for each person.

By framing the examination of an effective team in these theories, some interesting observations arise. For example, I spend my summers working as a waiter in a high-end restaurant in my home town. This restaurant, which from my personal experience was a poster child of proper team work, followed many of the teachings that Akerlof and the marble experiment showed are relevant. To begin, each functional group within the restaurant had a place within the overall hierarchy and each division gave all of its members equal base pay. The lowest pay grades were the bus boys and dish staff, who received a fixed time-based income for their work regardless of how many tables they bussed or dishes they washed. Above them were the hostesses, who received a higher fixed wage but also kept any tips received from takeout orders, which they were in charge of processing. Then came my team, the servers and bartenders, who received a fixed wage lower than the hostesses and bus boys but were also paid in tips from their own tables. Then finally were the chefs and kitchen staff, who received the highest base pay as well as a small fraction of the tips earned from their individual tables. While each team needed to work with other teams in order for the restaurant to provide full and effective service, each team also functioned within itself to accomplish its aspect of service. Based on the nature of the work each team had to do, the managers decided that different combinations of pay for performance and gifts in the form of additional hours and promotions to higher paying teams were necessary to keep everyone properly motivated. This way, people who shared the burden of work equally with their team members would be paid a fixed wage and rewarded with gifts for their effort while people who functioned autonomously but ultimately fulfilled the same function would be compensated with base pay as well as pay for performance in the form of tips. Also, depending upon how busy a dinner service was, servers sometimes pooled their tips and received an equal cut thus equalizing the pay for performance. This restaurant as an organization follows many of the patterns that Akerlof outlined, and working there taught me a great deal regarding what people consider to be fair payment and what it takes to keep people within an organization continuously motivated to put forth their best effort for the team.

Risk Management

This past week, we have taken a look at the economics behind future risk management from the perspective of a rational actor. The model we have discussed makes assumptions such as perfectly rational behavior and knowledge of various potential outcomes, but it is highly descriptive when it comes to seeing how people act in the face of risk and uncertainty. In my own life, I have already taken many steps to reduce future risks, primarily in terms of my intended career path. While some of my decisions have been well planned and intentional, I'm certain that other actions have been indirectly determined by my personal level of risk aversion, despite not always knowing the likelihood of specific outcomes. For example: my choice to attend college. Although it does not take much convincing to explain why college generally improves one's potential outcomes (employment, financial security, etc.), I never really examined what going to college really meant until I got here.

When I was a freshman in introductory microeconomics, I was introduced to the concept of opportunity cost. One of the examples the professor used to illustrate the idea was his students' decision to pursue a university degree. In an economic sense, the total cost of a college education includes not only the direct monetary cost of tuition, but also the highest value alternative that could have been pursued. With tuition costing in the ball park of $30,000 per year in addition to the amount of money I could have made working in a minimum wage position for four years, college is quite an expensive ordeal. I am one of the students lucky enough to have my parents pay my tuition, but even still why would I choose to forgo several years of income to attend class and earn nothing? The answer, as you may have suspected, is my expected outcome in the years following college. Instead of choosing to end my education following high school and starting to accumulate income with relative certainty, I took a path with greater uncertainty in exchange for a lower risk. I am still unemployed as I approach my graduation date, but there is a greater chance of me finding a suitable career with more competitive than if I had not chosen to attend college.

Another example of such behavior I have seen is my older sister's decisions following her college graduation. She is seven years older than I am, and is a University of Illinois alumnus. After making a similar decision to attend college rather than taking low paying but certain income, she began work for Delta Airlines as an analyst after her graduation. Then, after a few years of working, she decided to quit her job and pursue an MBA. Despite having a rather comfortable income after college, she did not have enough saved to pay for business school at Duke Fuqua School of Business. So, she took out student loans and took on a great deal of debt. She has since earned her MBA and found a job as a marketing manager with nearly double the income she had working at Delta. In other words, the potential value of improvement in her position brought about by earning an MBA was worth far more to her than the monetary value of her student debt and the forgone income from quitting her job.

While these examples are slightly more abstract than the insurance model we have been using to describe risk aversion and management, I think that both my sister's and my decisions regarding our educational paths are strong real-life examples of rational agents choosing a higher long-run payoff that is less certain over lower short-run payoffs that are more certain.

Illinibucks and Allocation

Here at the University of Illinois, we as students become conditioned to the idea of waiting for services and goods that we need. With 50,000 undergraduate students alone, this phenomenon is to be expected. Whether they manifest themselves as wait lists for admission, competition for scarce class availability, or even something as simple as waiting in line to checkout at the Illini Union Bookstore. I myself experience this everyday.

Just a couple weeks ago, I attended the Business Career Fair along with thousands of my peers and waited in line for hours over the course of two days simply to get a few minutes with recruiters from various companies. Students from nearly every college, LAS, the College of Business, the College of engineering, and so forth were all swimming among the crowds of people just to get a shot at an interview. Some of the people in line were simply there to get extra credit for career preparation courses, while others were graduate students looking for an experienced hire positions. While I understand this is simply a part of the recruitment process, I couldn't help but think that there must be a more efficient way to allocate applicants to recruiters. In this sense, the idea of "Illinibucks" could be that more efficient system. So long as a scarce number of Illinibucks are issued to students, then they could buy, sell, and trade to fit their needs. This would increase efficiency because students willing to spend more Illinibucks to achieve their personally optimal utility from various university services could do so, and those willing to spend less would thus receive lower priority.

In many of my economics courses to date, we have discussed similar cases of allocative efficiency using the idea of vouchers. A popular example is for public eduction. Why should students have to expect a certain quality of education because of where they live or whether their parents can afford to send them to a private school? Given a government voucher system, it is arguable that those who have the most to gain, i.e. would get the most utility out of a certain school, could use their voucher to opt out of public school and apply that implicit subsidy to private education. Alternatively, many scholars have discussed the benefits of cap and trade emissions regulation by issuing a finite number of pollution vouchers and allowing companies to trade amongst themselves to achieve efficient allocation of pollution allowances without exceeding an aggregate cap.

In relation to our class discussion of transaction costs, I believe that an Illinibucks system based on free trade between students could truly alleviate some of the congestion that occurs when trying to run such a large bureaucracy. This in turn could increase allocative efficiency of services to students and thus solve the issues we have in terms of getting priority for certain services.