Faculty & Research

Luis Garicano

Visiting Professor of Economics

Address :
5807 South Woodlawn Avenue
Chicago, IL 60637

Professor Garicano's research focuses on the interactions between internal firm choices and changes in the economy as a whole. In particular, he has studied how changes in the organization of firms affect economy-wide aggregates such as productivity growth, wage inequality; and viceversa, how ecoomic changes such as advances in information technology or changes in regulation affect the use of incentives and internal structure of firms. He has conducted empirical research for example on B2B exchanges, automobile franchise, law firms, police departments, and world wide management structures, as well as theoretical research on efficient hierarchies, on firm organization and wage inequality, on outsourcing and inequality, and on the matching of problems with expertise in firms and in markets. More broadly, he is interested in industrial organisation, labour economics, strategy, and law and economics. His research has earned him a directorship from the Centre for Economic Policy Research and the Banco Herrero Prize for the best Spanish researcher under 40 in the fields of economic, business and social research.

Professor Garicano obtained two bachelor's degrees, one in economics in 1990 and one in law in 1991, both from Universidad de Valladolid in Spain. He earned a master's degree in European economic studies from the College of Europe in Belgium in 1992. He then moved to the United States, where he earned a master's degree in economics in 1995 and a PhD in economics in 1998, both from the University of Chicago. He joined the faculty of the University of Chicago Booth School of Business in 1998, initially as Assistant Professor, progressing to Associate Professor in 2002 and full Professor in 2006. During his time at Chicago Booth he took leave to teach at the Sloan School of Management at the Massachusetts Institute of Technology (MIT), as well as London Business School. He is currently a professor in the in the Management and Economics Departments at the London School of Economics.

 

2013 - 2014 Course Schedule

Number Name Quarter
42800 Competitive Strategy 2014 (Winter)

Other Interests

Cooking, reading (particularly biographies), hiking.

 

Research Activities

Economics of acquisition and transmission of knowledge; organizing professional service firms; specialization; culture, language and codes in organizations; incentives; organization and strategy.

With Pol Antras and Esteban Rossi Hansberg, "Offshoring in a Knowledge Economy," Quarterly Journal of Economics (forthcoming).

With Natxo Palacios-Huerta and Canice Prendergast, "Favoritism under Social Pressure," Review of Economics and Statistics (May 2005).

With Tano Santos, "Referrals," American Economic Review (June 2004).

With Steven Kaplan, "The Effect of Business-to-Business E-commerce on Transactions Costs," Journal of Industrial Economics (2001).

"Hierarchies and the Organization of Knowledge in Production," Journal of Political Economy (October 2000).

For a listing of research publications please visit ’s university library listing page.

REVISION: Completing Contracts Ex Post: How Car Manufacturers Manage Car Dealers
Date Posted: Aug  01, 2011
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: Sep  25, 2009
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 resoluti

New: Organizing Offshoring: Middle Managers and Communication Costs
Date Posted: Jul  14, 2009
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 to

REVISION: Contractual Allocation of Decision Rights and Incentives: The Case of Automobile Distribution
Date Posted: Jun  16, 2008
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 manuf

The Effects of Business-to-Business E-Commerce on Transaction Costs
Date Posted: Apr  22, 2008
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, mark

Sabotage in Tournaments: Making the Beautiful Game a Bit Less Beautiful
Date Posted: Feb  18, 2008
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 incr

New: Organizing Growth
Date Posted: Feb  15, 2008
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. W

New: The Return to Knowledge Hierarchies
Date Posted: Sep  19, 2007
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 problem-

New: The Return to Knowledge Hierarchies
Date Posted: Jun  29, 2007
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 problem-

New: The Return to Knowledge Hierarchies
Date Posted: May  29, 2007
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 problem-

New: Organizing for Synergies
Date Posted: May  08, 2007
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 s

New: Computing Crime: Information Technology, Police Effectiveness and the Organization of Policing
Date Posted: Nov  14, 2006
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 agency-level

Contractual Allocation of Decision Rights and Incentives: The Case of Automobile Distribution
Date Posted: Jan  02, 2006
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 manuf

Intelligence Failures: An Organizational Economics Perspective
Date Posted: Sep  01, 2005
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 commissions

Organization and Inequality in a Knowledge Economy
Date Posted: Aug  02, 2005
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 acqu

Managerial Leverage is Limited by the Extent of the Market: Hierarchies, Specialization and the Util
Date Posted: Jun  21, 2005
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: Mar  30, 2005
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 equi

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Date Posted: Mar  01, 2005

Hierarchies, Specialization, and the Utilization of Knowledge: Theory and Evidence from the Legal Se...
Date Posted: Jun  23, 2004
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 whi

Specialization, Firms, and Markets: The Division of Labor Within and Between Law Firms
Date Posted: Jun  02, 2004
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 in

Hierarchies, Specialization, and the Utilization of Knowledge: Theory and Evidence from the Legal Se...
Date Posted: May  03, 2004
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 which

Codes in Organizations
Date Posted: Feb  09, 2004
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 external

Specialization, Firms, and Markets: The Division of Labor Within and Between Law Firms
Date Posted: May  26, 2003
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 invo

Specialization, Firms and Markets: The Division of Labour Between and Within Law Firms
Date Posted: Apr  29, 2003
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 more

The Effects of Business-to-Business E-Commerce on Transaction Costs
Date Posted: Sep  06, 2002
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 that

Favoritism Under Social Pressure
Date Posted: Sep  25, 2001
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 clos

Referrals
Date Posted: Sep  24, 2001
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 limit

Favoritism Under Social Pressure
Date Posted: Sep  18, 2001
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 g

Referrals
Date Posted: Aug  25, 2001
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 limit

Hierarchies and the Organization of Knowledge in Production
Date Posted: Sep  21, 2000
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 consi