Economics 174

Problem Set 4 -- Due Monday, June 7


1. What are routines, in the context of organizational theory?  What roles do they play within organizations?  Applying evolutionary theories of the firm, what makes firms perform particularly well in circumstances where their competitive environment changes quickly?

2. During the late 1880s, new, more efficient, means of producing (packing) meat were invented. Relatedly, Chandler writes that: "In 1882, Gustavus F. Swift, a Chicago meatpacker...began to build a nationwide distributing organization which owned, besides many [refrigerated railroad] cars, a network of refrigerated warehouses that also served as branch offices for the company's wholesale marketing forces."

From the analysis in class and in the readings regarding asset ownership and organizational change (two different topics), what forces provided Swift the incentive to a) own his own refrigerated railroad cars (as opposed to the railroad owning such cars), b) integrate downstream into the distribution and marketing of his meat? What other investments would you expect that Swift made at approximately the same time and why.

3. Woodruff (1999) examines shoe retailing in Mexico.  Non-contractible investments undertaken by retail store managers are important in certain circumstances.  These investments are knowledge investments -- managers who invest in learning about individual clients' tastes can sell more shoes.

4. Salespeople at retail apparel stores generally have several responsibilities.  One is that they are responsible for serving customers and encouraging them to purchase goods.  Another is that they are responsible for keeping the store looking good.  Part of this involves restocking clothes and making sure they are displayed neatly, either on hangers or folded on a shelf.  It generally takes little effort to make clothes on hangers look neat; it takes much more effort to make stacks of folded clothes look neat.

Assume the following.  Managers of apparel stores care both that individual salespeople sell clothes and undertake effort toward ensuring that their stores look neat.  It is relatively easy for managers to keep track of the sales generated by individual salespeople.  Because of this, it is feasible to reward salespeople with commissions. It is extremely difficult for them to develop measures of how neat displays look.  It is so difficult, in fact, that it is impossible for them to directly reward salespeople on the basis of how well they maintain displays.  While payment on commission indirectly provides salespeople incentives toward maintaining displays -- they sell more if their store looks nicer -- these indirect incentives are extremely weak, weak enough to be ignored completely.  Any effort expended by salespeople toward maintaining displays primarily comes from their pride from working at a nice-looking store.

Hidayatallah (1997) surveys 37 retail apparel stores in the South Coast Mall, and finds the following.  First, slightly over half of the stores pay their salespeople commissions.  Second, there is a negative correlation between paying salespeople commissions and the fraction of clothes in the store that were displayed folded.  That is, stores which displayed a high fraction of their clothes folded tended not to pay their salespeople commissions.  In contrast, those which displayed most of their clothes on hangers tended to pay them commissions.

Applying Holmstrom and Milgrom's theory, explain Hidayatallah's second finding.

At some retail stores, "team-selling" is used.  For example, different employees greet, serve, and ring out customers.  Would you expect commissions to be more common at stores which "team-sell" than those at which single salespeople greet, serve, and ring out customers?  Why or why not?