This project builds detailed theoretical models describing economic institutions. The models employ the methods of the theory of noncooperative games in extensive form, paying careful attention to issues of information and timing of actions. The objective is to understand better the efficiency properties of these institutions, why they exist and persist, and how to improve their performance. The institutions modeled span micro and macroeconomics. One part of the work focuses on detailed modeling of market institutions for determining the prices and quantities in transactions. A major element of this work is to study the possible emergence of involuntary unemployment in macroeconomic models with explicit microfoundations. The project already has demonstrated how labor rationing emerges naturally from business decision making. This work is generalized. The project seeks to determine whether appropriate government policies or institutional changes such as the use of the labor compensation contracts advocated by Martin Weitzman in his book "Share Economy" can reduce involuntary unemployment. The other part of the work focuses on the internal organization of the firm. Major elements in this part of the work are the concept of influence cost and the impact of technological change on organization. For example, the investigator demonstrated that personnel departments should be unresponsive, even to efficiency arguments, so as to prevent line managers' spending too much time trying to get good deals for their people and, in turn, to discourage employees' attempting to get managers to exert influence to their benefit. This work will be generalized into a novel theory of bureaucratic structure. Members of the bureaucracy are rewarded on grounds other than immediate organizational performance in order to reduce influence costs. This research is part of the emergence of a comprehensive, rigorous theory of organizations that is improving the scientific rigor of research on political and economic institutions and providing valuable new insights into a wide range of economic issues. The research on models of market organization and the foundations of macroeconomics is especially important because it synthesizes and reconciles two different bodies of theory that often give conflicting results about the possibility of persistent involuntary unemployment. The research on the internal organization of firms should provide new insights into ways of improving firm performance.
