Until recently, empirical analyses of firms focused almost exclusively on labor demand, investment and productivity. Little consideration was given to internal organizational design choices (such as the adoption of a training or incentive program). Indeed, most empirical studies of factor demand or productivity either abstract away from organizational design or consider at most a single dimension. However, a recent theoretical and empirical literature emphasizes the potential importance of interactions between different elements of organizational design.
A major finding of this literature is that organizational design practices are “clustered”: the adoption of practices is correlated across firms, and some “sets” of practices consistently appear together. Economic theory suggests that such clustering might arise if the choices are complements. Recent empirical work builds directly upon this theoretical analysis and explicitly “tests” for complementarity among practices using a variety of approaches. However, most of these studies have neither recognized nor accounted for the potential impact of unobserved variation in the costs and benefits of organizational design practices.
In this paper, we develop an econometric framework that can be used to provide a more complete evaluation of why practices appear together and how joint adoption affects firm-level productivity. We use this model to analyze the sources of bias that may be present in many of the econometric approaches used in the literature, and we formally analyze conditions under which the bias can be signed and interpreted. We further provide sufficient conditions for identification of the structural parameters of the “organizational design production function” and a consistent test for complementarity. Our analysis is tailored for cross-sectional applications where many firms face similar production technologies, make comparable choices about organizational design, but face different costs or benefits to adoption.
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For example, retail service outlets (such as a bank branch or a customer service center) are designed to accomplish similar goals, but operate in economic environments that differ in demographic characteristics, labor regulations, or technological infrastructure. These organizations make choices about practices such as on-the-job training, pre-employment screening and educational requirements, job guarantees, explicit incentives and bonuses, and the use of advanced telecommunications and information technology.