Underappreciated economists, a continuing series
Julio Rotemberg. OK, so being tenured at Harvard Business School is not the same as lost in the woods. But you don’t hear enough about him in the economics profession, when in fact he is one of our most creative thinkers.
My favorite Rotemberg paper is "A Theory of Inefficient Intrafirm Transactions," American Economic Review, 1991. It is poorly written and the model is clumsy but I love the idea. Firms do not exist to lower transactions costs, rather they usually raise transactions costs (price aside, wouldn’t you rather go buy a new computer from a retail outlet than try to order one through your purchasing department?). An asset is brought into a firm when an entrepreneur sees that the asset is currently underpriced. The firm buys the asset to capture future rents, but don’t expect ex post transactional efficiency to result. That being said, it makes sense to allow this process to continue, given the absence of serious alternatives to market bidding, however imperfect it may be.
Rotemberg’s paper on altruism explores the idea that you often feel altruism for your co-workers, but you rarely feel altruism for your boss. This will limit the degree of hierarchy; furthermore some firms may fear inter-employee altruism, knowing that it will be used against them. His paper on fairness constraints on market pricing is a brilliant, sprawling mess on a vitally important topic. Why do firms hold poorly publicized temporary sales? They want one group of customers to think the firm cares about their welfare, while those who buy after the sale ends feel no regret at paying the higher prices.
Here is a previous installment in this series on Brian Loasby.