Complementarity: Comparative Statics, Coordination and Change

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9320733 Milgrom In the standard theory of markets, prices coordinate a system in which independent decision makers, acting in their own interest, manage to use resources efficiently. Many economic problems, however, are characterized by fixed costs, indivisible goods, and other problems, where the price system does not in general lead to an efficient allocation. Firms and whole societies can get stuck at an inefficient allocation, what many economists now call a coordination failure. When such a system is characterized by strong complementarities among various decisions, that structure can sometimes be exploited to develop a more centralized approach to overcome the coordination failure. The broad objective of this research is to understand how firms and other complex organizations can organize to improve coordination in these situations. This project will (1) develop methods of comparative static analysis, (2) develop testable implications about the organization of firms based on the presence of complementarities, (3) identify the characteristics of decision problems, and (4) identify the sources of resistance to change by individuals and the methods by which these may be overcome. ***