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The Hidden Cost of Specialization

Author

Listed:
  • Fabio Landini

    () (MEDAlics and CRIOS, Bocconi University)

  • Antonio Nicolò

    () (University of Padua)

  • Marco Piovesan

    () (Department of Food and Resource Economics, University of Copenhagen)

Abstract

Given the advantages of specialization, employers encourage their employees to acquire distinct expertise to better satisfy clients’ needs. However, when the client is unaware of the employees’ expertise and cannot be sorted out to the most competent employee by means of a gatekeeper, a mismatch can occur. In this paper we attempt to identify the optimal condition so an employer can eliminate this mismatch and offer a team bonus that provides the first-contacted employee with an incentive to refer the client to the correct expert. We show that the profitability of this referral contract increases with the agents’ degree of specialization and decreases with the clients’ competence at identifying the correct expert. Interestingly, a referral contract may be more profitable than an individual contract -that does not pay a team bonus- even if the former provides less incentive to the agents to improve their expertise. Thus, we provide a new rationale for the use of team bonuses even when the production function depends on a single employee’s effort.

Suggested Citation

  • Fabio Landini & Antonio Nicolò & Marco Piovesan, 2013. "The Hidden Cost of Specialization," IFRO Working Paper 2013/9, University of Copenhagen, Department of Food and Resource Economics.
  • Handle: RePEc:foi:wpaper:2013_9
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    File URL: http://okonomi.foi.dk/workingpapers/WPpdf/WP2013/IFRO_WP_2013_9.pdf
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    References listed on IDEAS

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    1. Milton Harris & Artur Raviv, 2002. "Organization Design," Management Science, INFORMS, vol. 48(7), pages 852-865, July.
    2. Macho-Stadler, Ines & Perez-Castrillo, J. David, 1993. "Moral hazard with several agents : The gains from cooperation," International Journal of Industrial Organization, Elsevier, vol. 11(1), pages 73-100, March.
    3. Jonathan Levin & Steven Tadelis, 2005. "Profit Sharing and the Role of Professional Partnerships," The Quarterly Journal of Economics, Oxford University Press, vol. 120(1), pages 131-171.
    4. William Fuchs & Luis Garicano, 2010. "Matching Problems with Expertise in Firms and Markets," Journal of the European Economic Association, MIT Press, vol. 8(2-3), pages 354-364, 04-05.
    5. Thomas N Hubbard & Luis Garicano, 2003. "Specialization, Firms, and Markets: The Division of Labor Within and Between Law Firms," Working Papers 03-13, Center for Economic Studies, U.S. Census Bureau.
    6. Brent Boning & Casey Ichniowski & Kathryn Shaw, 2007. "Opportunity Counts: Teams and the Effectiveness of Production Incentives," Journal of Labor Economics, University of Chicago Press, vol. 25, pages 613-650.
    7. Uwe Dulleck & Rudolf Kerschbamer & Matthias Sutter, 2011. "The Economics of Credence Goods: An Experiment on the Role of Liability, Verifiability, Reputation, and Competition," American Economic Review, American Economic Association, vol. 101(2), pages 526-555, April.
    8. In-Uck Park, 2005. "Cheap-Talk Referrals of Differentiated Experts in Repeated Relationships," RAND Journal of Economics, The RAND Corporation, vol. 36(2), pages 391-411, Summer.
    9. Thomas N. Hubbard, 2009. "Specialization, Firms, and Markets: The Division of Labor within and between Law Firms," Journal of Law, Economics, and Organization, Oxford University Press, vol. 25(2), pages 339-371, October.
    10. Luis Garicano, 2000. "Hierarchies and the Organization of Knowledge in Production," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 874-904, October.
    11. Andrew J. Epstein & Jonathan D. Ketcham & Sean Nicholson, 2010. "Specialization and matching in professional services firms," RAND Journal of Economics, RAND Corporation, vol. 41(4), pages 811-834.
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    Cited by:

    1. repec:eee:pubeco:v:152:y:2017:i:c:p:143-153 is not listed on IDEAS
    2. Herrera, Helios & Reuben, Ernesto & Ting, Michael M., 2017. "Turf wars," Journal of Public Economics, Elsevier, vol. 152(C), pages 143-153.

    More about this item

    Keywords

    Team and Individual Contracts; Matching Client-Expert; Incentives to Refer;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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