The O‐Ring Theory of the Firm

20 Pages Posted: 2 Feb 2018

See all articles by Michael T. Rauh

Michael T. Rauh

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy

Date Written: Spring 2018

Abstract

We develop an O‐ring production function characterized by specialization and division of labor and where shirking or negative shocks can have major adverse consequences. We show that when the principal can monitor individual output, the firm tends be large (potentially larger than first best), with a high degree of specialization and division of labor, weak incentives, and low pay as in traditional nonunion manufacturing. Moral hazard can only limit the size of the firm relative to the first best when the principal can only monitor team output, in which case the firm has the opposite characteristics.

Suggested Citation

Rauh, Michael T., The O‐Ring Theory of the Firm (Spring 2018). Journal of Economics & Management Strategy, Vol. 27, Issue 1, pp. 82-101, 2018. Available at SSRN: https://ssrn.com/abstract=3116493 or http://dx.doi.org/10.1111/jems.12216

Michael T. Rauh (Contact Author)

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States

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