Faculty & Research

Luis Garicano

Visiting Professor of Economics

Address :
5807 South Woodlawn Avenue
Chicago, IL 60637

Luis Garicano is Visiting Professor of Economics at the University of Chicago Booth School of Business and Professor of Economics and Strategy at the London School of Economics. He was previously an Assistant, Associate and Full Professor of Economics and Strategy at Booth, and has held visiting positions at MIT’s Sloan School and at the London Business School. He is also a Research Fellow at the CEPR and an affiliate at the Center for Economic Performance.

Garicano's research focuses on the determinants of economic performance at the firm and economy-wide levels, on the consequences of globalization and information technology for economic growth, inequality and productivity (see here for an overview), and on the architecture of institutions and economic systems to minimize incentive and bounded rationality problems (see here for an overview). His empirical and theoretical research has been published, among other journals, in the American Economic Review, the Journal of Political Economy, the Quarterly Journal of Economics, the Review of Economic Studies, the Journal of Economic Literature and the Journal of Economic Perspectives. In 2007, he received the Banco Herrero prize for the best economist in Spain under 40 years old.

Garicano pursued undergraduate studies at the University of Valladolid, his home town, and earned degrees in Law and in Economics. He then obtained a Masters in European Economic Studies from the College of Europe in Belgium in 1992, and a Ph.D. in Economics from the University of Chicago. His main supervisor was the late Sherwin Rosen, and he was also helped by the late Gary S. Becker as well as by Kevin M. Murphy and Canice Prendergast.

Apart from his academic research, over the last few years Garicano worked on policy issues related to the Euro crisis. He coauthored a document on a Eurobond proposal (a summary can be found here in the WSJ). He also worked on policy issues involving the Spanish post bubble economy, where he has undertaken applied, policy relevant research, on the economic reforms necessary in Spain, producing documents among others on the Spanish Savings Banks, the Spanish labor market, the productivity of the Spanish economy, and the reforms required to adjust the health and pensions systems to the demographic changes that Spain is experiencing. Much of this work is summarized in the book, "El dilema de España" which has reached the top of the non fiction lists. He was the co-founder (and an editor until August 2013) of Nadaesgratis, the leading blog in Spanish on economic affairs. He tweets occasionally on Spanish issues (in Spanish!) as @lugaricano.

Since 2015, Garicano has been the main economic adviser, in charge of the Economic, Knowledge and Employment Policy at Ciudadanos, a party that is now in Parliament with 32 seats. His work on this program is summarized in Recuperar el Futuro with Toni Roldán, who is the Speaker on Economic Affairs of Ciudadanos. In December 2016, Garicano was named Vice President of the European Alliance of Liberal Democratic Parties (ALDE).

 

2016 - 2017 Course Schedule

Number Name Quarter
42800 Competitive Strategy 2017 (Winter)

2017 - 2018 Course Schedule

Number Name Quarter
42800 Competitive Strategy 2018 (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.

REVISION: The Sovereign-Bank Diabolic Loop and Esbies
Date Posted: Jun  14, 2016
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: Oct  22, 2011
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: 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 ...

New: Earnings Inequality and Coordination Costs: Evidence from U.S. Law Firms
Date Posted: Sep  20, 2009
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: 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 ...

New: The Distinct Effects of Information Technology and Communication Technology on Firm Organization
Date Posted: Jun  08, 2009
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: Feb  24, 2009
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: Jun  15, 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 ...

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, ...

Sabotage in Tournaments: Making the Beautiful Game a Bit Less Beautiful
Date Posted: Feb  17, 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 ...

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 ...

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 ...

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 ...

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 ...

New: Organizing for Synergies
Date Posted: May  07, 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 ...

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 ...

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 ...

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 ...

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 ...

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  29, 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 ...

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Date Posted: Feb  28, 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 ...

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 ...

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 ...

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 ...

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 ...

Specialization, Firms and Markets: The Division of Labour Between and Within Law Firms
Date Posted: Apr  28, 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 ...

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 ...

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 ...

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 ...

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 ...

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 ...

Hierarchies and the Organization of Knowledge in Production
Date Posted: Sep  20, 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 ...