9410194 Holmstrom This project covers three related topics in the economic theory of organization: the design of incentive systems when account is taken of the wide range of tasks and activities that employees may engage in; financial intermediation; and a theory of trust in face-to-face economic exchange. The first part explores the use of implicit incentives and their interaction with explicit incentives; the optimal design of jobs and job related constraints with an eye on the current trend towards increased worker empowerment and less bureaucracy; and the optimal allocation of activities across firms, with the goal of explaining where boundaries between firms are drawn. The second why firms use different sources of financing, what factors influence their relative roles and how severe financial crises affect real investment and the choice between funding options. Third part explores why verbal promises are useful in economic exchange. It is well known that most contracts are not enforced in court but depend on honoring one's word. Will contracts be simpler or modified in other ways when they rely on promises?
