Turbulence, Firm Decentralization and Growth in Bad Times

Philippe Aghion (College de France)
Nicholas Bloom (Stanford)
Brian Lucking (Stanford)
Raffaella Sadun (Harvard)
John Van Reenen (MIT)

Abstract : What is the optimal form of firm organization during “bad times”? Using two large micro datasets on firm decentralization from US administrative data and 10 OECD countries, we find that firms that decentralized power from the Central Headquarters to local plant managers prior to the Great Recession out-performed their centralized counterparts in sectors that were hardest hit by the subsequent crisis. We present a model where higher turbulence benefits decentralized firms because the value of local information and urgent action increases. Since turbulence rises in severe downturns, decentralized firms do relatively better. We show that the data support our model over alternative explanations such as recession-induced reduction in agency costs (due to managerial fears of bankruptcy) and changing coordination costs. Countries with more decentralized firms (like the US) weathered the 2008-09 Great Recession better: these organizational di↵erences could account for about 16% of international di↵erences in post-crisis GDP growth.

Does ‘performance Pay’ Pay? Wage Flexibility over the Great Recession

Christos Makridis (Stanford University)
Maury Gittleman (Bureau of Labor Statistics)

Abstract : Using quarterly job-by-establishment data from the National Compensation Survey between 2004 and 2014, we document substantial heterogeneity among performance pay and fixed wage jobs over the business cycle. We find that employment growth in performance pay jobs (fixed wage jobs) is either acyclical or countercyclical (procyclical), whereas compensation per employee growth is procyclical (countercyclical) in performance pay jobs (fixed wage workers). Our estimates are identified off the response of similar skilled jobs to metropolitan shocks, controlling for local demographics and establishment fixed effects. We provide suggestive evidence that these results are driven by the procyclicality (countercyclicality) of effort in performance pay (fixed wage) jobs. We subsequently examine the implications for three ongoing sources of debate in macroeconomics: (i) the vanishing procyclicality of labor productivity, (ii) generating sufficient unemployment volatility in search models, and (iii) explaining variation in the labor wedge.

Complementarity of Performance Pay and Task Allocation

Mu-Jeung Yang (University of Washington, Seattle)
Bryan Hong (Ivey School of Business)
Lorenz Kueng (Kellogg School of Management)

Abstract : Complementarity between different management practices has been argued to be one potential explanation for persistent performance differences across firms. Using detailed data on internal organization for a nationally representative sample of firms, we empirically test for the existence of complementary joint adoption of performance pay incentives and decentralization of decision-making authority for tasks. To address endogeneity concerns, we exploit regional variation in income tax progressivity as an instrument for the adoption of performance pay. We find systematic evidence of complementarity between performance pay and decentralization of decision-making from principals to employees. However, adopting performance pay also leads to centralization of decision-making authority from non-managerial to managerial employees. The findings suggest that performance pay adoption leads to a concentration of decision-making control at the managerial employee level, as opposed to a general movement towards more decentralization throughout the organization.