Ricardo Meets Nash

[Ignacio Palacios-Huerta]

Dear all,

In case it might be of interest, here is a new working paper. We are not sure but it may perhaps be the first time that Ricardo and Nash meet in the same paper :-)

Here are the title and abstract:

Title: Teamwork Frictions in the Ricardian Production Framework

Abstract: Motivated by the literatures on the economics of the firm and organizations, we introduce frictions that create strategic interactions in teamwork in the Ricardian framework that studies the role of skills, tasks, and technology in labor markets. We find that the efficient outcome remains a Nash equilibrium under these frictions if and only if every worker in the team is deferential. Further, all the Nash equilibria can be classified by a chemistry index that captures the aggregate nature of the group of workers. When workers as a group are self-centered, the equilibrium is inefficient because there is incomplete division of labor, and because workers specialize in some tasks that they should not be performing. When workers as a group are deferential, there is a multiplicity of Nash equilibria some of which exhibit full division of labor. However, in almost all of the equilibria, workers specialize in certain tasks that they should not be performing, and furthermore, their effort allocation goes against the schedule of comparative advantages. We also study the Ricardian framework with social skills and obtain similar characterizations. The analysis also sheds light on the existence of managers and the scope of authority in organizations. In the conventional framework, managers play no part. However, managers may now assume a pivotal role in addressing teamwork frictions. Yet, their role arises only when every worker is deferential, since it is only in this case that the efficient outcome is a Nash equilibrium that could be reachable by a talented manager.

And here is the link:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4834238

All the best,

Ignacio

Ignacio Palacios-Huerta

London School of Economics

Ikerbasque Foundation for Science