Visiting Professor of Economics
Luis Garicano returned in the summer of 2023 to the London School of Economics as a Full Professor at the School of Public Policy. He started his academic career at the University of Chicago Booth School of Business, where he attained the rank of full professor in Economics and Strategy after 10 years on the faculty and then at the London School of Economics, where he has been Full Professor in Economics and Strategy at the departments of Economics and Management of the school and head of the Managerial Economics and Strategy Group; in addition, he has been visiting professor at other institutions, among others MIT, Columbia Business School and the London Business School. He has held positions as an economist of the European Commission and McKinsey & Company, where he has also held a named chair with the FEDEA foundation.
His research has appeared in the leading international academic journals in economics, including The Quarterly Journal of Economics, The Journal of Political Economy, The American Economic Review and The Review of Economic Studies.
Garicano’s research focuses on the impact of organization and technology on aggregate economic variables like the wage distribution, productivity, or economic growth. He has studied why organizations and institutions fail and how to better design them. He has also studied how specific digital technologies are transforming the economy, such as for instance business to business electronic commerce, portable computing, enterprise resource planning or blockchain. His research has shown that it is the interaction between technology and its implementation, through organizational change, that really matters to induce productivity and change. His more recent research has studied how to build better institutions in Europe to avoid new economic crisis in the Eurozone.
For a few years, Garicano stepped out of academia and became a Member of the European Parliament (MEP) from 2019 to August 2022. While in Parliament he was a vice president of the Renew Europe Group in Parliament in charge of economic affairs and a vice president of the European political party Alliance of Liberals and Democrats for Europe (ALDE Party). He was a co-drafter of the legislation for the European Recovery and Reconstruction Fund, of the initial legislation on the Carbon Adjustment Mechanism, and led the efforts of the centrist group of the European Parliament (RenewEurope) on Russian sanctions and aid to Ukraine- he travelled with this purpose to Lviv and Kyiv twice on the first 2 months of the war. He recently co-wrote (with Beatrice Weder di Mauro and Dominc Rohner) a CEPR book on the “Economic Consequences of the Ukraine War.”
Luis Garicano holds bachelor’s degrees in economics and law from Universidad de Valladolid, a Master’s degree in European Economic Studies from the College of Europe in Bruges, and a Master’s degree and a Ph.D. in Economics from the University of Chicago.
He has contributed as a columnist to international media (e.g. Financial Times, Le Monde, Wall Street Journal or The Economist) and Spanish media (including e.g. El País, El Mundo, ABC and El Confidencial).
REVISION: Contractual Allocation of Decision Rights and Incentives: The Case of Automobile Distribution
Date Posted:Mon, 23 Jul 2018 03:38:00 -0500
We analyze empirically the allocation of rights and monetary incentives in automobile franchise contracts. All of these contracts substantially restrict the decision rights of dealers and grant manufacturers extensive rights to specify and enforce dealers' duties. The allocation of decision rights and incentive intensity differs across brands, however. This variation is explained by the incidence of moral hazard. In particular, when the cost of dealer moral hazard is higher and the risk of manufacturer opportunism is lower, manufacturers hold more rights to determine the performance required from their dealers and to use mechanisms such as monitoring, termination and monetary incentives to ensure that such performance is provided.
REVISION: Completing Contracts Ex Post: How Car Manufacturers Manage Car Dealers
Date Posted:Sun, 22 Jul 2018 13:59:10 -0500
This article illustrates how contracts are completed ex post in practice and, in so doing, indirectly suggests what the real function of contracts may be. Our evidence comes from the contracts between automobile manufacturers and their dealers in 23 dealership networks in Spain. Franchising dominates automobile distribution because of the need to decentralize pricing and control of service decisions. It motivates local managers to undertake these activities at minimum cost for the manufacturer. However, it creates incentive conflicts, both between manufacturers and dealers and among dealers themselves, concerning the level of sales and service provided. It also holds potential for expropriation of specific investments. Contracts deal with these conflicts by restricting dealers' decision rights and granting manufacturers extensive completion, monitoring and enforcement powers. The main mechanism that may prevent abuse of these powers is the manufacturers' reputational capital.
New: Blockchain: The Birth of Decentralized Governance
Date Posted:Thu, 10 May 2018 16:01:46 -0500
By allowing networks to split, decentralized blockchain platforms protect members against hold up, but hinder coordination, given that adaptation decisions are ultimately decentralized. The current solutions to improve coordination, based on “premining” cryptocoins, taxing members and incentivizing developers, are insufficient. For blockchain to fulfill its promise and out-compete centralized firms, it needs to develop new forms of “soft” decentralized governance (anarchic, aristocratic, democratic, and autocratic) that allow networks to avoid bad equilibria.
REVISION: The Sovereign-Bank Diabolic Loop and Esbies
Date Posted:Tue, 14 Jun 2016 11:07:48 -0500
We propose a simple model of the sovereign-bank diabolic loop, and establish four results. First, the diabolic loop can be avoided by restricting banks’ domestic sovereign exposures relative to their equity. Second, equity requirements can be lowered if banks only hold senior domestic sovereign debt. Third, such requirements shrink even further if banks only hold the senior tranche of an internationally diversified sovereign portfolio – known as ESBies in the euro-area context. Finally, ESBies generate more safe assets than domestic debt tranching alone; and, insofar as the diabolic loop is defused, the junior tranche generated by the securitization is itself risk-free.
REVISION: The Sovereign-Bank Diabolic Loop and Esbies
Date Posted:Wed, 10 Feb 2016 20:47:07 -0600
We propose a simple model of the sovereign-bank diabolic loop, and establish four results. First, the diabolic loop can be avoided by restricting banks’ domestic sovereign exposures relative to their equity. Second, equity requirements can be lowered if banks only hold senior domestic sovereign debt. Third, such requirements shrink even further if banks only hold the senior tranche of an internationally diversified sovereign portfolio – known as ESBies in the euro-area context. Finally, ESBies generate more safe assets than domestic debt tranching alone; and, insofar as the diabolic loop is defused, the junior tranche generated by the securitization is itself risk-free.
REVISION: The Sovereign-Bank Diabolic Loop and Esbies
Date Posted:Mon, 25 Jan 2016 05:34:01 -0600
We propose a simple model of the sovereign-bank diabolic loop, and establish four results. First, the diabolic loop can be avoided by restricting banks’ domestic sovereign exposures relative to their equity. Second, equity requirements can be lowered if banks only hold senior domestic sovereign debt. Third, such requirements shrink even further if banks only hold the senior tranche of an internationally diversified sovereign portfolio – known as ESBies in the euro-area context. Finally, ESBies generate more safe assets than domestic debt tranching alone; and, insofar as the diabolic loop is defused, the junior tranche generated by the securitization is itself risk-free.
New: Organizing for Synergies
Date Posted:Sat, 22 Oct 2011 07:15:45 -0500
Large companies are usually organized into business units, yet some activities are almost always centralized in a company-wide functional unit. We first show that organizations endogenously create an incentive conflict between functional managers (who desire excessive standardization) and business-unit managers (who desire excessive local adaptation). We then study how the allocation of authority and tasks to functional and business-unit managers interacts with this endogenous incentive ...
REVISION: Completing Contracts Ex Post: How Car Manufacturers Manage Car Dealers
Date Posted:Mon, 01 Aug 2011 08:37:42 -0500
This article illustrates how contracts are completed ex post in practice and, in so doing, indirectly suggests what the real function of contracts may be. Our evidence comes from the contracts between automobile manufacturers and their dealers in 23 dealership networks in Spain. Franchising dominates automobile distribution because of the need to decentralize pricing and control of service decisions. It motivates local managers to undertake these activities at minimum cost for the manufacturer.
New: Specialization, Firms, and Markets: The Division of Labor within and between Law Firms
Date Posted:Fri, 25 Sep 2009 03:06:12 -0500
This article uses confidential microdata from the Census of Services to examine law firms' field boundaries. We find that the share of lawyers working in field-specialized firms increases as market size increases and lawyers field specialize, indicating that transaction costs among lawyers, and not just complementarities in clients' demands, affect law firms' field boundaries. Moreover, we find that this pattern is mainly true when looking at fields where lawyers are involved in dispute ...
New: Earnings Inequality and Coordination Costs: Evidence from U.S. Law Firms
Date Posted:Sun, 20 Sep 2009 10:26:01 -0500
Earnings inequality has increased substantially since the 1970s. Using evidence from confidential Census data on U.S. law offices on lawyers’ organization and earnings, we study the extent to which the mechanism suggested by Lucas (1978) and Rosen (1982), a scale of operations effect linking spans of control and earnings inequality, is responsible for increases in inequality. We first show that earnings inequality among lawyers increased substantially between 1977 and 1992, and that the ...
New: Organizing Offshoring: Middle Managers and Communication Costs
Date Posted:Tue, 14 Jul 2009 02:34:26 -0500
Why do firms decide to offshore certain parts of their production process? What qualifies certain countries as particularly attractive locations to offshore? In this paper we address these questions with a theory of international production hierarchies in which organizations arise endogenously to make efficient use of agents' knowledge. Our theory highlights the role of host-country management skills (middle management) in bringing about the emergence of international offshoring. By shielding ...
New: The Distinct Effects of Information Technology and Communication Technology on Firm Organization
Date Posted:Mon, 08 Jun 2009 23:34:04 -0500
Empirical studies on information communication technologies (ICT) typically aggregate the information and communication components together. We show theoretically and empirically that these have very different effects on the empowerment of employees, and by extension on wage inequality. If managerial hierarchies are devices to acquire and transmit knowledge and information, technologies that reduce information costs enable agents to acquire more knowledge and 'empower' lower level agents ...
New: Earnings Inequality and Coordination Costs: Evidence from U.S. Law Firms
Date Posted:Tue, 24 Feb 2009 23:11:14 -0600
Earnings inequality has increased substantially since the 1970s. Using evidence from confidential Census data on U.S. law offices on lawyers' organization and earnings, we study the extent to which the mechanism suggested by Lucas (1978) and Rosen (1982), a scale of operations effect linking spans of control and earnings inequality, is responsible increases in inequality. We first show that earnings inequality among lawyers increased substantially between 1977 and 1992, and that the ...
REVISION: Contractual Allocation of Decision Rights and Incentives: The Case of Automobile Distribution
Date Posted:Sun, 15 Jun 2008 19:52:04 -0500
We analyze empirically the allocation of rights and monetary incentives in automobile franchise contracts. All of these contracts substantially restrict the decision rights of dealers and grant manufacturers extensive rights to specify and enforce dealers' duties. The allocation of decision rights and incentive intensity differs across brands, however. This variation is explained by the incidence of moral hazard. In particular, when the cost of dealer moral hazard is higher and the risk of ...
The Effects of Business-to-Business E-Commerce on Transaction Costs
Date Posted:Tue, 22 Apr 2008 03:49:27 -0500
This paper studies transaction costs changes arising from the introduction of the Internet in transactions between firms. We divide transaction costs into coordination costs and motivation costs. We classify coordination efficiencies into three categories: process improvements, marketplace benefits, and indirect improvements. For motivation costs, we focus on informational asymmetries. We apply this framework to internal data from an Internet-based firm to measure process improvements, ...
Sabotage in Tournaments: Making the Beautiful Game a Bit Less Beautiful
Date Posted:Sun, 17 Feb 2008 16:56:08 -0600
We exploit an incentive change in professional soccer leagues aimed at encouraging more attacking and goal scoring to obtain evidence on the effect of stronger incentives on productive and destructive effort. Using as control the behavior of the same teams in a competition that experienced no changes in incentives, we provide differences-in-differences estimates of the effect of the incentive change on the behavior of teams. We find that, although teams increased offensive effort, they also ...
New: Organizing Growth
Date Posted:Fri, 15 Feb 2008 00:18:40 -0600
We study the impact of information and communication technology on growth through its impact on organization and innovation. Agents accumulate knowledge through two activities: innovation (discovering new technologies) and exploitation (learning how to use the current technology). Exploitation requires the development of organizations to coordinate the work of experts, which takes time. The costs and benefits of such organizations depend on the cost of communicating and acquiring information ...
New: The Return to Knowledge Hierarchies
Date Posted:Wed, 19 Sep 2007 08:48:04 -0500
Hierarchies allow individuals to leverage their knowledge through others. time. This mechanism increases productivity and amplifies the impact of skill heterogeneity on earnings inequality. To quantify this effect, we analyze the earnings and organization of U.S. lawyers and use the equilibrium model of knowledge hierarchies in Garicano and Rossi-Hansberg (2006) to assess how much lawyers, productivity and the distribution of earnings across lawyers reflects lawyers' ability to organize ...
New: The Return to Knowledge Hierarchies
Date Posted:Fri, 29 Jun 2007 09:26:28 -0500
Hierarchies allow individuals to leverage their knowledge through others' time. This mechanism increases productivity and amplifies the impact of skill heterogeneity on earnings inequality. To quantify this effect, we analyze the earnings and organization of U.S. lawyers and use the equilibrium model of knowledge hierarchies in Garicano and Rossi-Hansberg (2006) to assess how much lawyers' productivity and the distribution of earnings across lawyers reflects lawyers' ability to organize ...
New: The Return to Knowledge Hierarchies
Date Posted:Tue, 29 May 2007 00:36:03 -0500
Hierarchies allow individuals to leverage their knowledge through others' time. This mechanism increases productivity and amplifies the impact of skill heterogeneity on earnings inequality. To quantify this effect, we analyze the earnings and organization of U.S. lawyers and use the equilibrium model of knowledge hierarchies in Garicano and Rossi-Hansberg (2006) to assess how much lawyers' productivity and the distribution of earnings across lawyers reflects lawyers' ability to organize ...
New: Organizing for Synergies
Date Posted:Mon, 07 May 2007 19:29:29 -0500
Multi-product firms create value by integrating functional activities such as manufacturing across business units. This integration often requires making functional managers responsible for implementing standardization, thereby limiting business-unit managers' authority. Realizing synergies then involves a tradeoff between motivation and coordination. Motivating managers requires narrowly-focused incentives around their area of responsibility. Functional managers become biased toward excessive ...
New: Computing Crime: Information Technology, Police Effectiveness and the Organization of Policing
Date Posted:Tue, 14 Nov 2006 10:28:01 -0600
How does information technology (IT) affect the organization of police work? How does it in turn affect police crime-fighting effectiveness? To answer these questions, we construct a new panel data set of police departments covering 1987-2003. We find that while IT adoption had substantial effects on a wide range of police organizational practices, it had, by itself, a negligible impact on crime-fighting effectiveness. These results are robust to various methods for controlling for ...
Contractual Allocation of Decision Rights and Incentives: The Case of Automobile Distribution
Date Posted:Mon, 02 Jan 2006 10:57:37 -0600
We analyze empirically the allocation of rights and monetary incentives in automobile franchise contracts. All of these contracts substantially restrict the decision rights of dealers and grant manufacturers extensive rights to specify and enforce dealers' duties. The allocation of decision rights and incentive intensity differs across brands, however. This variation is explained by the incidence of moral hazard. In particular, when the cost of dealer moral hazard is higher and the risk of ...
REVISION: Completing Contracts Ex Post: How Car Manufacturers Manage Car Dealers
Date Posted:Wed, 07 Dec 2005 05:52:45 -0600
This article illustrates how contracts are completed ex post in practice and, in so doing, indirectly suggests what the real function of contracts may be. Our evidence comes from the contracts between automobile manufacturers and their dealers in 23 dealership networks in Spain. Franchising dominates automobile distribution because of the need to decentralize pricing and control of service decisions. It motivates local managers to undertake these activities at minimum cost for the manufacturer.
Intelligence Failures: An Organizational Economics Perspective
Date Posted:Thu, 01 Sep 2005 08:44:43 -0500
Two recent failures of the United States intelligence system have led to the creation of high-level investigative commissions. The failure to prevent the terrorist attacks of 9/11 prompted the creation of the 9/11 Commission, and the mistaken belief that Saddam Hussein had retained weapons of mass destruction prompted the creation of the Weapons of Mass Destruction Commission. We use insights from organizational economics to analyze the principal organizational issues raised by these ...
Organization and Inequality in a Knowledge Economy
Date Posted:Tue, 02 Aug 2005 13:19:11 -0500
We present a theory of the organization of work in an economy where knowledge is an essential input in production: a knowledge economy. In this economy a continuum of agents with heterogeneous skills must choose how much knowledge to acquire and may produce on their own or in organizations. Our theory generates an assignment of workers to positions, a wage structure, and a continuum of knowledge-based hierarchies. Organization allows low skill agents to ask others for directions. Thus, they ...
Managerial Leverage is Limited by the Extent of the Market: Hierarchies, Specialization and the Util
Date Posted:Tue, 21 Jun 2005 07:00:35 -0500
This paper examines hierarchies' role in the organization of human-capital-intensive production. We develop an equilibrium model of hierarchical organization, then provide empirical evidence using confidential data on thousands of law offices from the 1992 Census of Services. We show how the equilibrium assignment of individuals to hierarchical positions varies with the degree to which their human capital is field-specialized; then show how this equilibrium changes with the extent of the market.
Offshoring in a Knowledge Economy
Date Posted:Tue, 29 Mar 2005 17:46:03 -0600
How does the formation of cross-country teams affect the organization of work an the structure of wages? To study this question we propose a theory of the assignmenof heterogeneous agents into hierarchical teams, where less skilled agents specialize in production and more skilled agents specialize in problem solving. We first analyze the properties of the competitive equilibrium of the model in a closed economy, and show that the model has a unique and efficient solution. We then study the ...
...
Date Posted:Mon, 28 Feb 2005 21:51:50 -0600
Hierarchies, Specialization, and the Utilization of Knowledge: Theory and Evidence from the Legal Se...
Date Posted:Wed, 23 Jun 2004 07:01:18 -0500
What role do hierarchies play with respect to the organization of production and what determines their structure? We develop an equilibrium model of hierarchical organization, then provide empirical evidence using confidential data on thousands of law offices from the 1992 Census of Services. The driving force in the model is increasing returns in the utilization of acquired knowledge. We show how the equilibrium assignment of individuals to hierarchical positions varies with the degree to ...
Specialization, Firms, and Markets: The Division of Labor Within and Between Law Firms
Date Posted:Wed, 02 Jun 2004 11:50:51 -0500
What is the role of firms and markets in mediating the division of labor? This paper uses confidential microdata from the Census of Services to examine law firms' boundaries. We find that firms' field scope narrows as market size increases and individuals specialize, indicating that firms' boundaries reflect organizational trade-offs. Moreover, we find that whether the division of labor is mediated by firms differs systematically according to whether lawyers in a particular field are mainly ...
Hierarchies, Specialization, and the Utilization of Knowledge: Theory and Evidence from the Legal Se...
Date Posted:Mon, 03 May 2004 12:41:30 -0500
What role do hierarchies play with respect to the organization of production and what determines their structure? We develop an equilibrium model of hierarchical organization, then provide empirical evidence using confidential data on thousands of law offices from the 1992 Census of Services. The driving force in the model is increasing returns in the utilization of acquired knowledge. We show how the equilibrium assignment of individuals to hierarchical positions varies with the degree to ...
Codes in Organizations
Date Posted:Mon, 09 Feb 2004 01:48:36 -0600
A code is a technical language that members of an organization learn in order to communicate among themselves and with members of other organizations. What are the features of an optimal code and how does it interact with the characteristics of the organization? This Paper develops a simple communication model and characterizes optimal codes. There exists a fundamental trade-off between choosing a specialized code that simplifies internal communication and a common code that facilitates ...
Specialization, Firms, and Markets: The Division of Labor Within and Between Law Firms
Date Posted:Mon, 26 May 2003 07:28:03 -0500
What is the role of firms and markets in mediating the division of labor? This paper uses confidential microdata from the Census of Services to examine law firms' boundaries. We find that firms' field scope narrows as market size increases and individuals specialize, indicating that firms' boundaries reflect organizational trade-offs. Moreover, we find that whether the division of labor is mediated by firms differs systematically according to whether lawyers in a particular field are mainly ...
Specialization, Firms and Markets: The Division of Labour Between and Within Law Firms
Date Posted:Mon, 28 Apr 2003 23:29:49 -0500
What is the role of firms and markets in mediating the division of labour? This Paper uses confidential microdata from the Census of Services to examine law firms' boundaries. We first examine how the specialization of lawyers and firms increases as lawyers' returns to specialization increase. In fields where lawyers increasingly specialize with market size, the relationship between the share of lawyers who work in a field-specialized firm and market size indicates whether firms or markets ...
The Effects of Business-to-Business E-Commerce on Transaction Costs
Date Posted:Fri, 06 Sep 2002 05:20:55 -0500
In this paper, we study the changes in transaction costs from the introduction of the Internet in transactions between firms (i.e., business-to-business (B2B) e-commerce). We begin with a conceptual framework to organize the changes in transaction costs that are likely to result when a transaction is transferred from a physical marketplace to an Internet-based one. Following Milgrom and Roberts (1992), we differentiate between the impact on coordination costs and motivation costs. We argue ...
Favoritism Under Social Pressure
Date Posted:Tue, 25 Sep 2001 08:09:11 -0500
This paper provides empirical evidence of favoritism by agents, where that favoritism is generated by social pressure. To do so, we explore the behavior of professional soccer referees. Referees have discretion over the addition of extra time at the end of a soccer game (called injury time), to compensate for lost time due to unusual stoppages. We test for systematic bias shown by Spanish referees in favor of home teams. We show that referees systematically favor home teams by shortening ...
Referrals
Date Posted:Mon, 24 Sep 2001 06:00:42 -0500
Specialization requires that workers deal with some valuable opportunities themselves and refer other, possibly unverifiable, opportunities to other workers. How do markets and organizations ensure the matching of opportunities with talent in the presence of informational asymmetries about their value? The cost of providing incentives for effort in this context is that they increase the risk of the agent appropriating an opportunity she should refer upstream. Thus spot markets are severely ...
Favoritism Under Social Pressure
Date Posted:Tue, 18 Sep 2001 09:12:04 -0500
This paper provides empirical evidence of favoritism by agents, where that favoritism is generated by social pressure. To do so, we explore the behavior of professional soccer referees. Referees have discretion over the addition of extra time at the end of a soccer game (called injury time), to compensate for lost time due to unusual stoppages. We test for systematic bias shown by Spanish referees in favor of home teams. We show that referees systematically favor home teams by shortening close ...
Referrals
Date Posted:Sat, 25 Aug 2001 06:38:15 -0500
Specialization requires that workers deal with some valuable opportunities themselves and refer other, possibly unverifiable, opportunities to other workers. How do markets and organizations ensure the matching of opportunities with talent in the presence of informational asymmetries about their value? The cost of providing incentives for effort in this context is that they increase the risk of the agent appropriating an opportunity she should refer upstream. Thus spot markets are severely ...
Hierarchies and the Organization of Knowledge in Production
Date Posted:Wed, 20 Sep 2000 20:24:42 -0500
This paper studies how communication allows for the specialized acquisition of knowledge. It shows that a knowledge-based hierarchy is a natural way to organize the acquisition of knowledge when matching problems with those who know how to solve them is costly. In such an organization, production workers acquire knowledge about the most common or easiest problems confronted, and specialized problem solvers deal with the more exceptional or harder problems. The paper shows that the model is ...
| Number | Course Title | Quarter |
|---|---|---|
| 42800 | Competitive Strategy | 2024 (Winter) |
Chicago Booth visiting professor Luis Garicano, a member of the European Parliament, spoke with Booth's Luigi Zingales about the current and future role of government.
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At the end of each soccer game, referees add extra time to the match to make up for time spent dealing with injuries, substitutions, and other interruptions to the game.
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Understanding the tradeoff between coordination and incentives.
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