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- Choice and Allocation

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- Choice and Allocation This chapter is mainly about situations in which people make choices and goods and services are distributed. The most familiar such situation is the market, but choices and allocation play essential roles in all organizational and political contexts. Among the questions that have come to dominate recent research in this area are the following: What are the distinctive features of collective in contrast with individual choice and decision making? Is it true that "who controls the agenda controls the decision," and if so, in what sense? What do electorates really choose, and how does the choice situation presented to them affect the outcome? What are the forms and consequences of internal political struggles within organizations? How do external, institutional con- straints (such as constituencies interested in the fate of organizations) affect these processes? In looking more narrowly at markets and related economic activities, current research considers such questions as: How are choices in markets affected by the availability of information and the structure of incentives? When and how do efforts to influence incentives through regulation contribute to more or less efficient market systems? To what extent are the expectations of economic agents based on "rational" factors and to what extent are they influenced by other factors? What considerations do economic agents take into account when they ne- gotiate and strike bargains with one another? How exactly do repeated inter- actions and stability of a relationship among agents change these processes? 8S

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86 / The Behavioral and Social Sciences How do complex patterns of information, incentives, constraints, and discrim- ination affect wage rates and other outcomes in the labor market? The issues of social groups selecting among alternative possibilities and de- ciding on allocations of scarce goods and resources, coupled with the use of power to enforce certain decisions, are central to two disciplines, political science and economics. But other kinds of knowledge are also involved. Since organizations are often the key to carrying out those choices and allocations, insights from social psychology and sociology are needed, and recent work has incorporated laboratory experimental methods evolved in behavioral psychol- ogy. Many issues are addressed most effectively by combining all of these perspectives. COLLECTIVE CHOICE AND ORGANIZATIONAL BEHAVIOR Decisions are inevitably affected by faulty memory, limited capacity to pro- cess information, and uncertainty about various factors that affect the outcome. Within these inescapable constraints, people who must make decisions should take into account all of the possible consequences of choice, good and bad, and their probabilities of occurring, not overlooking events whose probabilities are extremely small. The growth and understanding of individual decision making was discussed in Chapter 1. But important decisions are often assigned to groupsboards of directors, committees, legislatures, and the like. Such decisions, or collective choices, involve a social process that introduces a range of considerations quite different from those involved in individual decision making. Research on collective choice has focused mostly on formal decision mech- anisms of voting and on resource allocation, especially of public goods. Of particular interest is a mathematical approach that illuminates and yields strong predictive power in analyzing legislative agenda formation and electoral pro- cedures. A major challenge at present is to understand the group processes that underlie many private decisions in the business world as well as issues that arise in public voting. This work on group process, carried out mainly by investigators in social psychology and organizational behavior, has amassed a great deal of data and has led to a considerable body of informal theory, but so far detailed formal or computer-simulated models have been rare. Work in this area is expected to grow, in part because of the enormous economic and social importance of improved decision making to both government and busi- ness. Setting Agendas Many organizations have the capacity to make certain choices that are likely to be disadvantageous or even oppressive to some members, and even in the

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Choice and Allocation / 87 face of dissent or dissatisfaction they can, to a degree, enforce these choices. At the highest level of social organization, taxation without reciprocal services, conscription to fight in a war that some individuals, alone or as part of an organized minority, regard as illegitimate, and imprisonment are extreme ex- amples. Most organizations, even fundamentally political ones, are formally voluntary- citizens can, in principle, leave the city, state, or nation; stock- holders can sell their stock; workers can quit their unions- but these "exit" options may be so costly, unattractive, extreme, or ineffective that they are hardly real options. More serious are the options of vocal contention, disrup- tion, or withdrawal of support, active participation, enthusiasm, and diligence. The need to maintain such support in spite of disagreements and conflicts with members leads to the establishment of complex and sophisticated procedures for legitimating decisions, generating loyalty, and resolving intraorganizational disputes. Because majority-rule voting systems are explicit, formal, and very common, they are the best understood of such procedures. A centrally important, un- desirable feature of such voting systems is that they typically exhibit a particular kind of fundamental indeterminacy. For example, suppose that a group of three people (or three voting factions of equal size) uses a majority-rule voting procedure to select one of three alternatives a, b, or c. Suppose further that the first voter or group prefers a to b and b to c, and so a to c; the second voter, b to c and c to a, and so b to a; and the third voter prefers c to a and a to b, and so c to b. Thus, one simple majority (voters 1 and 3) prefers a to b, another majority (voters 1 and 2) prefers b to c, and a third majority (voters 2 and 3) prefers c to a. No alternative is preferred to both of the other two. So the choice of any one of the three alternatives appears to be wholly arbitrary and will be determined by the order in which the alternatives are considered. A major theoretical finding of the l950s, whose significance is only gradually being recognized in practice, was a general proof that whenever a system of majority rule is used to choose among more than two alternatives, the outcome will in general depend on the order in which pairs of options are considered, the so-called voting agenda. This general mathematical property of majority rule under these conditions makes it highly susceptible to manipulation. It was shown, under plausible assumptions about the distribution of individual pref- erences, that if the agenda for voting can have any effect at all, then it completely dominates all other effects. The voting order can be selected so as to lead a group to choose nearly any option on the table, including those options that virtually everyone would initially consider to be undesirable. The logical struc- ture of majority rule thus entails the possibility that anything can happen, depending on the agenda sequence. This means that control over the agenda over the order of voting or other procedures- is extraordinarily important, as is obvious in the simple example above. These theoretical observations have been shown to apply empirically to many

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88 / The Behavioral and Social Sciences complex and realistic situations. Whenever the number of alternatives is siza- ble, the probability that there is a single, universal majority winner over all other options is very small, and the outcome depends largely on the procedures for determining the order of consideration of the alternatives the agenda. Recent experimental work clearly demonstrates that an agenda of a particular form, implemented and rigidly followed in situations in which individuals are unaware of other's preferences (as in secret-ballot elections), can succeed in controlling a group decision. Furthermore, this phenomenon has been shown to hold not only for majority rule, but for most of the voting rules in common use that entail subdividing the set of alternatives into a series of votes. Two avenues of research in this area are now under intensive study: explicit treatments of improved, fairer agenda setting for those social decisions that involve sequential voting among alternatives, and the development of amal- gamated-preference decision schemes that require only a single, simultaneous vote and are not subject to serious distortions due to strategic voting. One important approach in this area, approval voting, is discussed below. Sequential and Simultaneous Votes Since the source of power in organizations rests heavily on the ability to affect agendas, both their constitutions (or other fundamental contracts) and the strategic behavior of conflicting parties (for example, their rhetorical pres- entation of issues) must be analyzed in terms of agenda processes. Basic theo- retical research on agendas begins with the much simplified case in which agenda items arise in a known order and the preferences of all participants are fully known to everyone. As research knowledge about such extreme cases has increased, it has become possible to study rigorously cases much closer to the real world, in which knowledge of the preferences of others is imperfect. U1- timately the test of any attempt to design a better agenda-setting procedure is that it should both be easy to implement and should reduce the probability of disastrous outcomes, such as electing candidates who are low on everyone's ranking or those who are backed by an intense, organized minority even though these candidates are disapproved by the majority. The natural alternative to sequential voting procedures are ones in which each voter must report, at one time, something about his or her preference ordering of all of the alternatives, and this information is amalgamated by some specific rule to generate the social choice. A famous result, much studied and elaborated, shows that if all voters provide a detailed ranking of their alterna- tives, it is mathematically impossible to devise a fully satisfactory procedure, one that meets all of the usual requirements of fairness, to yield an amalgamated group ranking. The most pernicious feature of most procedures for amalgam- ating preference orderings is that they invite strategic voting, in which a voter reports deceptively about alternatives other than his or her most preferred one.

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Choice and Allocation / 89 For example, in one widely used by small committees attempting to rank several alternatives, each voter ranks the alternatives from best to worst, and the group ranking is obtained by adding the numerical rankings assigned to each alter- native. A common strategic move is for a voter to put his or her second (third, and so on) choices at the bottom of the list if those options appear to be the first choices of a substantial number of other voters. The effect of such a move is to increase the likelihood that the strategic voter's first choice will win out despite the fact that more people prefer one of the other choices. Such strategic voting clearly creates a distortion in the social process, and realization of that fact has prompted a search for procedures that are far less susceptible to such manipulation, although they will necessarily have some other undesirable feature. One example, not yet fully understood, is approval voting, in which each voter partitions all of the candidates into only two sets, approved and not approved. The procedure seems to work well in practice if each voter splits the approvals and nonapprovals about equally, but additional theoretical, field, and experimental work is needed to understand more fully its properties both limitations and virtues when the approval/nonapproval split is not equal. To some degree, progress has been hampered by limited resources since the experimental and observational work involved must be quite extensive. But because voting is such a pervasive feature of modern societies, especially ours, it seems to be a wise investment to understand better how best to carry it out. Electorates One problem of institutional design that is important for contemporary society is to render electoral systems fair to individuals and to significant groups during periods of social change as well as during more stable times. In the United States, Great Britain, Australia, and Canada unlike continental Europe and most other areas of the world the most common election procedure is plurality: the candidate with the most votes wins. While single-member-district plurality elections predominate at the national and state level in the United States, multimember-district plurality elections are quite common at the mu- nicipal or county level. Plurality multimember districts have come under in- creasing attack in federal courts for diluting the voting strength of racial and linguistic groups, and testimony based on collective choice theory has played a critical role in these challenges to multimember districts. Certain provisions for majority runoff elections have also come under challenge as racially dis- criminatory in their effects. A body of research has been conducted during the past decade on the properties of runoff systems, and future work to fuse this analytic theory with other approaches may lead to definitive knowledge about these systems. No country in the world makes greater use of balloting of one sort or another

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90 / The Behavioral and Social Sciences as a decision mechanism than does the United States, which has by far the highest ratio of elected officials per citizen. Only rarely is the choice between just two alternatives to be decided by majority. Not only are there often more than two choices, but much balloting rests on a complex federal system whose multitiered structure also generates layers in political parties. In addition, spe- cial majorities are required for certain kinds of actions; concurrence of more than one voting body is usually required for legislation (bicameralism); veto powers of various sorts govern the relationships between legislature and ex- ecutive; one unit may have the power to propose and another the power to block; and so on. Understanding the properties of such complex, layered organizational ar- rangements is no easy task, but much progress has been made in the past two decades. In particular, models based in part on game theory have permitted researchers to reexamine and develop new understanding about many complex institutional arrangements (for example, the veto powers of the "big five" in the United Nations Security Council, the character of the U.S. presidential electoral college, voting rules in the European Economic Community) in terms of a common framework. Such models have made it possible to discover when apparently minor changes in procedures may actually have major effects that otherwise would not be anticipated. Research has also illuminated the link between types of electoral systems, distribution of partisan support (as measured in votes received by a party's candidates), and legislative seat shares. For example, an important hypothesis, the algebraic cube law of the relationship between the proportion of votes cast for a party across all districts and the proportion of seats it will win in the legislature, has been reformulated in a very general fashion, incorporating fac- tors such as the average number of seats being contested per district and the effective number of political parties contesting them. This revised model per- mits far more accurate predictions than were previously available of the prob- able consequences of changes in election procedures, as in France's shifts be- tween plurality and proportional representation. A number of key issues, such as changes in candidate and voter behavior in response to changes in election rules, await additional observations and theory to be incorporated into the model. Going beyond matters of particular decision making to the overall theory of democracy, one central and long-standing problem concerns the relation be- tween voting and the ideals of popular participation and control over govern- ment. In one popular vision of democracy, voting is expected to produce programmatically coherent results so that popular participation is sensible and effective. Yet analyses of multiple-option voting agendas reveals that it is quite possible for voting results to be persistently incoherent. This discovery chal- lenges the town meeting view of the fundamental basis of democracy. In par- ticular, the concept of direct voting as a means to enact directly a consistent

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Choice and Allocation / 91 popular will into law, which is rapidly becoming technically feasible because of electronic networks, simply may not be a coherent way to legislate. In contrast, the concept of voting as a means of changing officials and thus af- fecting the law at a greater remove embodied in most U.S. legislative proce- dures seems quite consistent with the discoveries of collective choice theory. Founding Political Systems A final major area of research in collective choice is the founding of political systems. Virtually all societies experience periods when the fundamental pro- cedures of voting, agenda control, and dispute resolution become matters of conscious collective choice, perhaps exercised through an ad hoc representative body such as a constitutional assembly, a party convention, or a committee convened under military auspices and subject to plebiscitary ratification. The adoption of the Constitution is the most familiar example in the United States, but there are many others in recent history, including lapan, West Germany, and the numerous states that emerged from the territories of European colonies after World War II. At these moments in history, society (or at least parts of it) becomes the designer of its own organizational structures, and its choices determine in large part the future viability, effectiveness, and justice of those structures. Continued historical and comparative analyses of the creation of such political organizations including studies of the alternatives then avail- able will lead to understanding the information, incentives, and conflicts that were pertinent to those who created them, as well as the effects of the proce- dures by which those organizations were created. It is also important to un- derstand how later generations of leaders and citizens have read and interpreted those earlier historical moments and how they brought them to bear suc- cessfully or not on the economic, social, and political developments that could not have been envisioned by the organization's original designers. Although overall research progress in the study of agendas and voting sys- tems has been driven largely by theoretical work, a substantial commitment exists to empirical testing, observation, and application. The descriptive liter- ature on political parties, interest groups, committees, and related organiza- tional forms is rich, but needs further codification in terms of collective-choice models. Progress has been made in developing laboratory and systematic ob- servational methods for studying collective choice processes, but this work is in a relatively early stage and will benefit from additional, focused research. ORGANIZATIONAL DESIGN AND CHANGE The past 20 years have seen considerable progress in research on the deter- minants of organizational structure. The first phase in this program of research

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92 / The Behavioral and Social Sciences developed what has come to be known as contingency theory. According to this perspective, optimal organizational design buffers the technological core, which is the material process of production, from external shocks. It does so by creating peripheral structures designed to deflect or absorb such environ- mental turbulence as market volatility, political change, major legal rulings, and the like. The optimal design depends on the detailed needs of the technical production system and the nature of the environmental variations and uncer- tainties. In this model, if the technology is relatively stable and the environment varies along a limited spectrum of possibilities, the needed organizational struc- ture is highly routinized and unchanging. Most organizational change is thus contingent on fairly revolutionary shifts in either the technological base or in the economic, political, or legal environment. More recent research has broad- ened the theoretically admissible sources of change and sources of stability in the face of pressures for changes by focusing on less formalized variables in the organization and its environment and studying closely the evolutionary movements that bring organizations more slowly but just as surely into new alignments with new capabilities. Organizational Politics and Institutional Constraints Research in the past decade has focused on two informal features of orga- nization that have far-reaching implications: organizational politics and insti- tutional constraints. Resource allocation within organizations is subject to in- tense political contest among agents within the organization, in business as in government. There are two main causes of such struggles. First, in large modern firms information and decision making is in fact decentralized, whatever the formal structure, due to the very limited capacities of decision makers, even aided by large computers, to observe, process, and communicate information efficiently. The largest private employer in the United States, General Motors, employs some 660,000 people, enough to fill every job in metropolitan San Diego or in the state of West Virginia. While most firms, even in the Fortune S00, are much smaller than General Motors, the median size of the these firms is still 13,000 employees, far too large an internal economy to be managed effectively without substantially decentralized information and decision mak- ~ng. The private information of a decision maker yields a measure of power to pursue private goals that may be in conflict with corporate goals. Moreover, the many players in the internal corporate economy shareholders, directors, managers, workers, and, sometimes, creditors typically have at least partly divergent interests; hence, it is difficult even to impute to a firtn a single overall objective. Among the objectives of the several types of players in the firm are profits, market share, growth, monetary compensation for managers and work-

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Choice and Allocation / 93 ers, quality of work, perquisites, and status. In addition, the different players may have different attitudes towards risks. Resource allocation and, thus, ul- timately, organizational structure and strategy depend, at least in part, on processes of coalition formation and contest, especially when the costs and benefits of alternative allocations are difficult to measure and forecast. To go beyond the insights provided by case studies, the systematic analysis of these organizational coalitions and contests, now requires a move toward large-scale data collection among representative samples of organizations. An active line of research has been concentrating on institutional constraints on organizations. Organizational designs are constructed and evaluated in a sociocultural context. Some designs have extensive social backing, that is, they are codified and promulgated by professional associations and schools or by government agencies. Designs also stand as markers of difficult-to-observe competencies, such as managerial acumen, and are therefore used strategically to signal such competencies. And seemingly neutral arrangements tend to be- come infused with moral value by members of organizations, turning means into ends. Designs may proliferate even when they make little or no contri- butions to productive efficiency if they serve the political or institutional pur- poses of subgroups within organizations or other powerful agents in the en- vironment. Ethical and religious factors continue to play important roles as they have throughout history, such as the centuries-long effect on economic . ~ 1. . . 1 organizations ot religious views about usury. Research on organizational politics and institutional processes has made clear that organizations face strong inertial pressures. Attempts at radical redesign, especially in large, established organizations, spark political opposition and activate institutional resistance. Even without those pressures, there are bound to be transaction costs, that is, the costs of change. Opposition and costs can delay reorganizations that would take advantage of changing opportunities or enable better response to competitive threats. A core problem in explaining the spread of organizational forms is to learn how structural arrangements affect the speed and flexibility of response of large organizations. Organizational Evolution Although the dynamics of organizational evolution are more difficult to understand than the maintenance of existing organizational structures, a num- ber of new developments are noteworthy. Using both theoretical and empirical techniques, researchers have developed insights into the formation of com- modity and financial markets, the evolution of regulatory structure, the emerg- ence of legal rules, the development of political institutions, and the principles of organizational change generally. Much of the theorizing and empirical research on organizational evolution focuses on environmental factors. Some theories rest essentially on the diffusion

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116 / The Behavioral and Social Sciences of women becoming doctors, lawyers, and coal miners. The evidence is that women's aspirations are shaped by their expectations about what kinds of occupations are accessible to them, rather than by fixed preferences for partic- ular jobs. Since the actual preferences of women have been shown to play a limited role in explaining their segregation into lower paying occupations, research attention has turned to the ways in which other influences affect the assignment of women to "women's work." For example, one line of accumulating research has investigated the role of people who make available information about var- ious occupations, especially about their entrance requirements; the research shows that such information is presented differently to male and female stu- dents, from preschool to vocational training programs. Other research focuses on the detailed behavior of employers who characteristically do not hire women into men's jobs and vice versa, or who steer prospective applicants into gender- typed openings, and of unions, particularly those that have histories of ex- cluding women or of not representing demands for pregnancy leave and other benefits that favor women, while supporting seniority benefits and other de- mands that favor men. Analytic attention has also focused on the effects of husbands discouraging their wives from job training or employment that would modify their regular home activities or of persuading their wives to leave their jobs when the hus- bands relocate. These effects may be reinforced by differential job ladders and training programs for men's and women's positions in firms, firm-wide job evaluation systems that underestimate the training and conditions of jobs held primarily by women, and institutionalized requirements in many jobs held primarily by men to work overtime or relocate at the employer's bidding. The wage gap may itself perpetuate a pattern of household decision making in which a husband's occupational opportunities and choices come first because they are more critical for household income. The lower valuation accorded to work by women by the structure of wage rates becomes, in effect, a self-fulfilling prophecy. What is especially promising in many of these new lines of research is the focus on developing longitudinal or process data, which permit researchers to discriminate between competing theories that may all be inferentially consistent with data on outcomes alone. Technology, Migration, and Mobility The organization of work and the evolution of working careers has long been an active and productive research area. One area of current controversy con- cerns how present trends of technological change affect the quality of work- places and career opportunities. Do these changes increase or diminish skills, responsibilities, and commensurate rewards on the job? A second area of con-

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Choice and Allocation / 117 troversy surrounds the factors that shape the organization of work. One tra- ditional view is that, when technologies change, firms adopt the work arrange- ments that best achieve administrative and technical efficiency, generally subject to a degree of bureaucratic lag. However, recent studies of technological change document considerable discretion in how specific jobs are organized, indicating that imperatives other than technical efficiency may systematically shape work redesign. Some researchers suggest that detailed distinctions among jobs serve to reduce the importance of high skill levels, diminishing workers' control of job activities and dividing various subgroups of the labor force. Moreover, there is evidence that powerful people in organizations often redefine work roles to suit their idiosyncratic interests and abilities, not necessarily those of the firm. Yet another controversial area of research involves the link between schooling and career. One view is that employers define jobs in terms of productivity requirements and then use educational credentials to decide whether individ- uals are likely to satisfy those requirements. An opposing view is causally the opposite, namely, that organizations define jobs and career paths around their workers' educational attainments. Research has yet to provide evidence for selecting between these two views. Recent analyses of labor markets focus attention both on career movement within organizations, including the manner in which vacancies occur at the top of an organizational ladder and move down them as a chain of promotions, and on movement among firms. Different determinants and consequences are associated with these two types of career mobility. For example, women, racial and ethnic minorities, the young, and the old are thought by some to move from firm to firm within the "secondary labor market," where skills are non- speciEc, job tenure is precarious, and few career advantages are obtained by switching firms. In this view, the "primary labor market" includes both career movement within firms (internal labor markets) and movement among high- skilled jobs among firms. The effects of immigration and of international competition on domestic work organization, including wage rates, is another area of substantial interest. Because of substantial reductions in fertility in the United States in recent decades, immigration and regional migration have become major components of population change. Neoclassical economic theory, which viewed migration as an equilibrating response to differences in prices and wages, has proved inadequate to explain the observed population flows. Recent findings are that expectations about future earnings and changes in nonearnings income, rather than current interregional wage-rate differentials, induce migration, which in turn induces new business investment. Furthermore, research shows that areas with high inmigration also experience high outmigration, and that regional differences in income and unemployment change slowly despite high levels of place-to-place migration. Studies of migration decisions at the household level

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118 / The Behavioral and Social Sciences find that they are based on surprisingly little information. Better longitudinal data on expectations, perceived alternatives, and actual mobility decisions of households is needed to refine and detail the dynamic processes of expectation formation and decision making that influence migration. At other than the household level, data on relevant migrational firm behavior, the role of regional government competition for private investment and development, and the mutual effects between migration flows and the operation of local labor and housing markets are all sparse at this time. At the international level, recent research has established that migration not only adds a new set of workers into the existing production organization, but it also changes the way in which work itself is organized. Immigrants, especially illegal ones, are much less likely to be employed in large factories than indig- enous workers; they work in small, highly mobile shops, at home under a piece-rate system, as sharecroppers in agriculture, or as itinerant wage laborers under the gang system. Old industries like garment and footwear production and new ones like electronics have become increasingly"informalized" through their reliance on immigrant labor. These changes in the organization of work as a result of international migration are of fundamental theoretical as well as policy significance. Research is badly needed to asses the results of the new federal legislation on illegal immigrants in the context of labor markets that rely on immigrant labor. New Sources of Data on Jobs and Careers A central limitation facing researchers interested in explaining labor market phenomena is the lack of longitudinal data on individual work histories, work arrangements within firms, and the ways that both change over time that is detailed enough to distinguish competing theories of employment contracting, job search, employment, job design, career patterning, and wage allocation. At present, sizable research investments in dynamic data bases are largely devoted to samples based on households and families. An example that illustrates the rich returns of these kinds of data is the finding on poverty from the Panel Study of Income Dynamics (PSID), which has been collecting data since 1968 on S,OOO families, chosen to be repre- sentative of the national population. (Prior to this research investment, the empirical information base for understanding the well-being of the population came almost entirely from cross-sectional or "freeze-frame" studies, which gath- ered information from independent samples at one or more points in time.) The PSID results confirmed the cross-sectional finding that, in each year over a 10-year period, about 7 percent of people were in families whose incomes fell below the line. But the PSID data showed that nearly 25 percent of the sample fell below that line in at least 1 of the 10 years, approximately S percent during 5 or more years, and approximately 3 percent during 8 or more years.

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Choice and Allocation / 119 The PSID results made it possible to distinguish between people who are temporarily poor and those who are persistently poor and to assess the size and character of each of these populations. More generally, the PSID data showed that only about half of the best-off Americans were also best-off 7 years later and only half of the also worst-off were worst-off 7 years later. The major determinants of such changes in income level were transitions in marital status and similar familial events. Such a precise and unexpected finding of the relatively large degree of movement that exists within the seemingly stable American income distribution could not have arisen from earlier cross-sectional statistics of income distribution. Now, of course, on the basis of the new knowl- edge, new cross-sectional studies may be developed to confirm and extend such findings with retrospective queries. To achieve a similarly enriched picture of job and career dynamics in the context of the employers and firms that produce income and invest in new technologies in contrast with the households that consume them requires longitudinal research data comparable in scale. Longitudinal data for large representative samples of firms, jobs, and workers would allow researchers to see how external forces on organizations, including business cycles and atti- tudinal and technological changes, compare with factors inside organizations, including managerial structures, promotion practices, and compositions of work forces, to shape hiring and recruitment, the design of jobs, and career outcomes. In addition, data could be obtained on decision making that affects employment in the face of sometimes rapidly changing technologies, contrac- tual arrangements with employees, suppliers, and customers of firms, and organizational perceptions, politics, and cultures in firms over time. Such data would permit much sharper empirical tests than have so far been carried out concerning theories of job segregation, wage inequalities, unemployment, pro- ductivity, and organizational dynamics and might lead to completely new knowledge about the nature of work and organizations. A second source of potentially rich data lies in historical knowledge on such matters as how the composition of the labor force responded to past immigra- tion and how the nature of work was transformed by changing technologies and organizational structures in earlier periods. While good longitudinal and comparative data on work arrangements in the past are hard to find, researchers have recently identified several large-scale sources that could significantly en- rich historical understanding of work and careers. Several large corporations have maintained detailed data describing employees' job histories over many decades: these records, which are classed as inactive and are no longer of any practical value to the companies, represent a largely untapped source of data for researchers to assess how changing technologies, organizational structures, and labor market conditions affected job design and workers' career outcomes . . m an ear .1er era. Such archives have potential value not only for the study of organizational

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120 / The Behavioral and Social Sciences change and internal labor markets but also for the study of industrial science and technology (discussed in Chapter 49. Some work has already begun in these directions. This work would be well served by a general initiative to develop joint public/private sponsorship of data development and analysis projects to convert an appropriate sample of archives of major U.S. corporations into social and historical research centers or repositories. During the 1930s the U.S. Employment Service began gathering data on the staffing patterns, promotion ladders, and job requirements of various estab- lishments. Until the program was eliminated several years ago, these data were collected throughout the country (for some organizations, at more than one time) in order to prepare the Dictionary of Occupational Titles and other gov- ernment publications. Microfilm or original documents exist in Washington, D.C., and in the program's central repository in Raleigh, North Carolina. Ma- chine-readable versions of these files would provide researchers with invaluable longitudinal and comparative information on the organization of work and opportunity in American industry over the last half century. Researchers have already converted a very small subset of these data (for example, California enterprises analyzed since 1959) into machine-readable format, developing coding procedures that could be used in a larger effort. Other data sources in government records might also be useful for studies of work and careers. However, the need to protect the confidentiality of indi- vidual respondents places important restrictions on data about organizations that are in the files of the Census Bureau, the Internal Revenue Service, and the Bureau of Labor Statistics, among other agencies. And because of the growth of extensive privately held computer records regarding individuals, house- holds, and firms such as files maintained by business information companies, direct-mail firms, political action committees, health insurance consortia, credit bureaus, and the like and the availability of increasingly sophisticated rec- ords-linkage software and fast, powerful computer workstations and super- computers, federal agencies have become even less willing to make edited data accessible to researchers, even after identifying information has been deleted. In fact, there is no instance on record of a qualified scientific researcher using such records-linkage possibilities to identify individuals, much less using such information inimically; however, researchers do share the concern that less benign interests may exploit public-access files in ways that would not be acceptable either to those who have disclosed the information or to the agencies that have ultimate fiduciary responsibility for it. Given this situation, it is worthwhile to explore arrangements that might provide access to disaggregated data files (microdata) on firms and other kinds of organization without unac- ceptable risks to confidentiality. For example, contractual arrangements for temporary use of screened files by qualified researchers, providing penalties against breaches of confidentiality similar to those that bind government em- ployees, may be an appropriate and acceptable solution.

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Choice and Allocation / 121 Questions about individual career patterns that cannot be easily addressed by organization-based or job-based samples in particular, occupational as- pirations, mobility between organizations, and geographic migration may best be addressed through work-event histories that are based on existing longitudinal panels, such as the Panel Study of Income Dynamics, the National Longitudinal Survey of Labor Market Experience, and the Survey of Income and Program Participation. There is no simple formula to determine what kinds of research questions can best be answered through new data collection efforts rather than through concerted efforts to gain carefully protected access to file data. In many cases the two resources are complementary. In order to advance this field of study rapidly and efficiently, the agencies involved and representative researchers should work to formulate systematic long-term investment plans for the data needed for the research opportunities discussed above. OPPORTUNITIES AND NEEDS Three kinds of work are important to advance the understanding of deci- sional, allocative, and organizational phenomena: (1) theoretical analyses of choice, information, incentives, and behavior in markets and other organiza- tional contexts; (2) empirical studies, especially of policy-relevant issues, using panel and longitudinal data on organizations and individuals in organizational context; and (3) refinement and extension of laboratory and field experiments to inform both theoretical and policy questions. In spite of many past advances, knowledge about choice and allocation is still fragmentary. Experimental work has been limited to a few topics, and observational studies in policy settings have been limited by the availability of data. The advances do suggest, however, that continued research along the lines already initiated is fully warranted, and can be expected to generate valuable new knowledge in such diverse areas as regulatory and legislative reform, the design of financial markets, job segregation and wage gaps, and assessment of the implications and effects of corporate mergers and takeovers. We recommend a total of $56 million annually to support research on these topics. Certain themes are virtually certain to continue in the next decade: the relationship between information, incentives, and the performance of organi- zations and market systems; the constraints imposed by human and techno- logical limitations on information processing; the effects of divergent goals and dispersed information on the design of organizations; and the formal properties and purposes of contracts over time. New knowledge can be expected from further development and application of theories of individual decision making under conditions of uncertainty, as it arises from incomplete information about

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122 / The Behavioral and Social Sciences the environment and about the motivations and decisions of other actors in the situation. Important work can also be expected on theories of the mecha- nisms of collective choice, including strategic behavior, the manipulation of agendas, and the possibility of self-enforcing provisions against cheating. Such research will involve all three kinds of research work: theory development; empirical studies, including the collection of longitudinal data, particularly when repeated interactions are the issue; and laboratory and field experiments. For the study of mechanisms and institutions that promote organizational durability, flexibility, and effectiveness (as well as their opposites), a mix of historical, demographic, and ethnographic research methods are needed. Much of the most valuable research in the topics covered in this chapter has been supported entirely by traditional investigator-initiated grants, and they can be expected to continue to yield rich results. We therefore recommend a substantial expansion of investigator grants, in an annual amount of approxi- mately $20 million. While, overall, new equipment needs are not large by comparison with some other kinds of research, improved computer hardware and development of advanced software for investigators are essential, and we recommend, accordingly, approximately $4 million annually above current expenditure levels for these categories of equipment and support. We are especially concerned with the diversion of young research talent at the postdoctoral level away from research careers, due to the attractiveness of opportunities in nonacademic careers and the paucity of postdoctoral research positions. We therefore recommend that an additional $5 million annually be added to the support of postdoctoral research fellows and an additional $1 million to predoctoral fellowships. One of the most powerful devices for encouraging deep and rapid theoretical research has been the fostering, on a continuing basis, of networks of individ- uals working on closely related issues. The research at the Cowles Commission at the University of Chicago in the 1940s and 1950s offered many examples of the major breakthroughs that can occur if like-minded scientists interact on a regular basis. Much of the recent work on incentives and information has come from initial breakthroughs made by a group of researchers from across the country and abroad, meeting in regular colloquia twice a year. One or two week-long conferences during the academic year and a 2- to 4-week summer workshop, coupled with some resources for graduate students or postdoctoral trainees, have proved able to encourage very rapid breakthroughs on well- chosen subjects. Expenditure for such research workshops should be expanded with an additional $3 million annually. One of the most important developments over the past two decades is the emergence of controlled experimentation on decision making and the design of market and other types of organizations for allocating^resources. Even a simple market transaction is governed by many rules and understandings about property and contract, the value and stability of money, and credit. Political

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Choice and Allocation / 123 institutions of elections and representation are likewise nestled in a web of rules and procedures meant to regulate the process and produce recognizable and accepted outcomes. These processes have traditionally been studied in real world settings, but successful efforts have been made to bring the study of organizational and market behavior into the laboratory. In a number of cases, the success in doing so without falling into the trap of losing or distorting the phenomenon of major interest in the attempt to isolate it has been striking. To investigate the importance of rules and procedures, laboratory experi- menters have people engage in imaginary but familiar transactions. Experi- menters can systematically change the rules of the transaction game, varying the procedures, incentives, information, or objectives given different groups of subjects. The terms of the transactions, for example, may be defined as simple one-shot bartering, as auction or bidding situations, as short-term, high-risk situations, or as long-term, predictable relations between trading partners. The results indicate that these properties are powerful determinants of traders' preferences and show in detail how they can be expected to work. Laboratory experiments, although far from a substitute for field research which, among other things, is needed to check on the idealizations introduced in the labo- ratory constitute an efficient complement that permits much greater control over research variables and overcomes the need to wait for many events to occur in the real world in order to test every plausible hypothesis. Experimental work is critical to theory development. Experimental methods require specification of the detailed structure of the processes presumed to be operating in the markets or other forms of organization under study. The impact of the new data on theory has also been dramatic. Many basic principles and assumptions have come under close examination, leading to new theories and important revisions of older ones. ~ Application of experimental methods requires some long-term investments. First, support is needed for the development of additional laboratories, both for equipment, space, and communication devices such as interactive com- puters, and, more important, for professional staff who can develop software and maintain and improve hardware. We believe that the establishment of new laboratories and the improvement of existing laboratories requires an increased annual expenditure of $2 million. Second, theorists from a variety of disciplines must be able to participate in the design, evaluation, and interpretation of experiments. The theoretical issues are often so detailed or subtle that sustained communication is necessary to design appropriate experiments. The phenomena of interest often require input from several disciplinary sources so that the emerging set of principles can find use in applications. Colloquia, released time, and provisions for visiting sci- entists are needed. Moreover, training in experimental methods must be expanded. A major strength of the experimental method is the opportunity for different researchers

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124 / The Behavioral and Social Sciences to replicate results. Replication necessitates standardization of procedures and methods. Such standardization has been facilitated in other laboratory sciences through decades of teaching laboratory methods in high school and college. Experimental methods to study markets, contracts, organizations, and agent behavior have not had the advantage of such large-scale background support. Training is needed for researchers to learn the procedures of laboratories where experimentation is being conducted, replicate the original results of others, and thereby consolidate scientific advances while gaining high-quality exper- imental skills. The additional training can be effected in part by postdoctoral fellowships and opportunities to spend periods of a month or two at existing facilities. All of these ancillary activities- interdisciplinary and interinstitu- tional collaboration in the design of experiments, periodic visits, and training in experimental procedurescould be sustained by a new program of exper- imental centers at $4 million per year. This chapter identified specific areas where new kinds of empirical data are needed. Data on expectation-formation at the individual level, for example, possibly including programs of laboratory experiments, would help isolate the causes of departure from rational-expectations hypotheses that are observed in financial markets. Study of rigidities underlying unemployment at the mac- roeconomic level require detailed data on contract structure and the stickiness of price adjustments. Chronological data on collective bargaining and arbitra- tion, possibly collected in held studies in which the arbitration rules vary, would permit much more accurate assessment of the role of rules and precom- mitments in successful collective bargains. This chapter also singled out two types of longitudinal research that promises significant knowledge. First, longitudinal data are needed on the behavior of firms, particularly promotion practices and the trickle-down of vacancies, pro- cedures for evaluating and rewarding performance, and the nature and extent of on-thejob training. These data need to be matched with panel data on workers. Detailed information about contracts with attention to the provisions for wage and hours adjustments and layoff rules need to be collected to assess the impact of economy-wide and firm-specific risk on the welfare of workers. The incidence and effects of multiyear labor contracts with unions should be studied in connection with the observed stickiness of wages. Second, longi- tudinal data on the organizations as such in contrast to individuals or con- tracts are required to gain a deeper understanding of their dynamics and their strategies of decision making; their response to changes in the economic, po- litical, and legal environments; and their strategies for survival, expansion, and change in general. Collecting longitudinal data is as expensive as it is important. The initiation of a number of appropriately designed large-scale longitudinal core projects, sustained over the requisite multiyear period, with solid support for archiving, documentation, dissemination, and technical and analytic assistance to users,

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Choice and Allocation / 125 will require an additional annual expenditure of $12 million. For maximum benefit of such expenditure these data collections should become the core to which are attached research projects that involve other methods, particularly ethnographic studies of the workplace and of occupations, network analyses of job opportunities, and field experiments. A necessary complementary strategy to collecting new data is to cultivate, supplement, and disseminate existing research data and other potentially val- uable data files more thoroughly. To do so requires establishing more effective, better supported lines of communication among academic research centers. An example of such communication is specialty-area computer networks, which have been established largely in psychological and human-developmental areas of research. This strategy also requires the establishment and maintenance of better lines of communication between researchers and the relevant data-col- lecting administrative agencies and private firms, to ensure that records assem- bled for purposes other than science or research can be made as useful as possible to the scientific community. We estimate that the total range of ap- propriate efforts to improve access to the most useful data that now exist in a series of academic research centers, government agencies, and private sources will cost approximately $S million annually, of which $1 million should be especially directed to the exploration and cultivation of private record centers (such as insurance clearinghouses) and unused corporate and local government archives for research purposes.

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