CAREER: The Organization and Reputation of Firms

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Modern economies exhibit a broad diversity of organizational forms: from small owner-operated firms to employee-owned partnerships, cooperatives, non-profits, and finally investor-owned corporations. Two important assets that a firm has are its organizational form and function, and its market reputation. A fundamental problem in economics is to understand both the forces that lead to these different forms of organization and what determines the value of these two intangible assets. This project proposes an economic framework for studying the economics of organizations, with focus on organizational form and firm reputation. The first part of the proposal studies partnerships and their role in the professional services. The approach highlights three ingredients that favor the formation of partnerships: (1) the importance of human capital in production; (2) a lack of information on the part of clients that leads them potentially to be concerned about the quality of the service they will obtain; and (3) the differing incentives of partnerships and corporations in the hiring and selection of senior employees. The theoretical model developed will explain why partnerships are typical in the professional services, where human capital is primary input to production and the nature of the service provided may be quite difficult for consumers to accurately assess, but rarely observed in manufacturing, technology, or lower-skill service industries. Associated with this project is a rich set of policy questions concerning which forms of organization the law and regulatory policy should accommodate. There is no single coherent framework for understanding the differences between partnerships and corporations, or for understanding the specific economics of professional services that have led to this particular form of organization. This project will offer a starting point for a broader investigation of market structure in the professional services, for examining legal and regulatory issues in these industries, and for interpreting empirical evidence about the structure of professional organizations.The second part of the proposal investigates the economic value of a firm's reputation, and how the dynamics of entrepreneurial behavior and firm reputation are linked. Building heavily on the insights I have gained from my previous work on firm reputation, I propose to empirically test the clear predictions of my theoretical work on the market for names using data on restaurants that combines both changes in ownership and reputation dynamics. The proposal also outlines some new theoretical ideas that would lead to a richer set of empirical predictions, and relate firm reputation to dynamic entrepreneurial choices. In particular, the "entrepreneurial spirit" may be related to particular types of people who specialize in creating new businesses, and who then pass on the successful ones to other people who specialize in maintaining ongoing enterprises. Understanding the link between the dynamics of a firm's reputation, and its effect on the creation and turnover of businesses, may help us understand the dynamics of entrepreneurial activity. Furthermore, the framework may offer some policy implications regarding the disclosure of information with respect to ownership turnover.