By Guido Friebel
During SIOE's conference in Chicago, the Oliver Williamson Best Conference Paper Award was awarded to Jacob Kohlhepp (University of North Carolina, Chapel Hill) for his paper "The Inner Beauty of Firms."
Market competition shapes the structure and processes of firms, but how are market outcomes shaped by the capacity of firms to organize their processes? Jacob Kohlhepp addresses this fascinating question with a unique dataset on beauty salons in the USA.
Kohlhepp observes that beauty salons differ substantially in the degree to which workers are specialized to carry out certain actions like washing hair, cutting, or blow-drying, while others are not. More specialized salons are more productive, but specialization has costs, for instance, the communication needed to coordinate activities within the salon. This costs differs across managers.
Detailed data from all salons that use a certain software allow for identification of price sensitivity, worker skill sets and material costs, but even more, also for a lower bound of the costs associated with specialization. The model can be used to estimate the effects of shocks to this, specific, labor market and shows that productivity effects of shocks will be underestimated when the costs of reorganization are not taken into account.
The paper makes an important step forward to a better understanding of the complex interactions between market forces, exogenous shocks and the effects of management and organization on productivity and wages. It is a showcase of what organizational economics can do in times in which detailed datasets on the internal economics of firms are becoming available.