Modern management theories ppt

modern leadership theories ppt and modern theories of management ppt
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Published Date:26-07-2017
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Amadou BOLY September 2015 Modern Theories of Development Outline of the Presentation • Definition of Concepts • Big Push Model • Kremer’s O-Ring Model • Conclusion Definition of Concepts • Complementarity An action taken by one firm, worker, or organization that increases the incentives for other agents to take similar or related actions. Complementarities often involve investments whose return depends on other investments being made by other agents. • Coordination failure A coordination failure is a state of affairs in which agents’ inability to coordinate their behavior (choices) leads to an outcome (equilibrium) that leaves all agents worse off, compared to an alternative situation that is also an equilibrium. Illustration 1: Prisoners’ Dilemma • Two prisoners are isolated from each other and do not know how the other will respond to police questions about a crime. • Each prisoner can betray by accusing the other, or cooperate by remaining silent. • If A and B both betray the other, each of them goes to jail for 2 years. • If A betrays B but B remains silent, A will go free and B will serve 3 years in prison (and vice versa). • If A and B both remain silent, both of them will only serve 1 year in prison 0. Player B Decisions Cooperate Betray Cooperate (A=1, B=1) (A=3, B=0) Player A Betray (A=0, B=3) (A=2, B=2) Illustration 1: Prisoners’ Dilemma Player B Decisions Cooperate Betray Cooperate (A=1, B=1) (A=3, B=0) Player A Betray (A=0, B=3) (A=2, B=2) • What happens depends on what both do ⇒ Complementarity • However, neither of them know how the other will respond. The rational choice (equilibrium) is to Betray, but Cooperation would make both players better off •⇒ Multiple equilibria ⇒ Coordination Failure Illustration 2: Industrialization • Assume a country wants to develop a steel industry • It needs e.g. railways, coal for furnace, iron and engineers • Consider undertaking separate investments: − Railway alone – who will use it? − Coal alone: who will buy it? How to transport it? − Steel factory alone: no coal, no freight, no engineers? − Only engineering school – no jobs for them. • All of the investments are needed ... ⇒ Complementarity • ... at the same time ⇒ Coordination • Presence of multiple equilibria … 6 Illustration 3: Other Examples • In many cases, the presence of complementarities boils down to the classic “chicken and egg” problem: Which comes first? • Firms needing workers with specialized skills and the availability of such workers (firms will not enter vs workers will not acquire skills). • Signing up for an instant messaging system or learning a particular computer program. 7 Illustration 4: Multiple Equilibria - Graph ο 45 line Y 1 D D D D 2 t 1 3 Expected decisions by other agents (e.g. average investment level) Privately rational decisions (e.g. individual investment level) Multiple Equilibria, Complementarities and Coordination • Complementarities can result in multiple equilibria • With coordination failure, the economy can get stuck at the bad equilibrium • How to move the economy into the ”good” equilibrium, when stuck? • On to the Big Push model... 9 Big Push à la Krugman: Assumptions Factor supply − One factor of production, labour, in fixed supply L, used in two sectors: traditional (TS) or modern (MS): 𝐿 = 𝐿𝐿 + 𝑀𝑇 𝑤𝑤 𝑇𝑀 • Define : 𝑤 = = 1, noting that 𝑤 𝑤 𝑇𝑇 𝑤𝑤 Technology • N goods are produced (N large) 𝑻 • Constant Return Scale in TS, with units chosen so that 𝑸 =𝑳 𝒊𝒊 𝑴 • Increasing Return to Scale in MS ⇒𝑳 =𝑭 +𝒄𝑸 with 𝑐 1 𝒊 𝒊 • Identical production function for all products, 𝑖 , in respectively TS and MS 𝐿𝐿Big Push à la Krugman: Assumptions Demand 11 𝑁 ∑ • Cobb-Douglas and symmetric ⇒𝑝𝑄 =𝑝𝑄 =𝑌 𝑖𝑖𝑗𝑗 𝑗=1 𝑁𝑁 Market structure • TS : perfect competition ⇒𝑀𝐿 =𝑝 = 1 𝑖𝑖 • MS : one monopolistic producer of one good 𝑖 and demand elasticity =−1 ⇒𝑝 = 1 𝑖 Big Push à la Krugman: Graph (1) Note same budget share for all goods = each good gets 1/N of total demand, and same production function for all goods, i , in respec. TS or MS, then L/N workers in each sector if total production is in either TS or MS Q • So if all production is in either MS Slope = 1/c i TS or MS: 𝑊 =𝑤 .𝐿 𝑖 𝐿 • Traditional: 𝑄 = 𝑇 𝑁 B Q 2 𝐿 /𝑁−𝐹 • Modern: 𝑄 = 𝑀 𝑐 A 𝐿 /𝑁−𝐹𝐿 Q •𝑄 𝑄 if 1 TS slope = 1 𝑀𝑇 𝑐𝑁 • Modern sector is profitable if: 𝑄 𝑊 𝑀 F 0 L/N L i 12 Big Push à la Krugman: Graph (2) - Wage in MS above B (High) ⇒ 𝑊 =𝑤 .𝐿 𝑖 MS slope = 1/c Q i No industrialization 𝑊 =𝑤 .𝐿 𝑖 - Wage in MS below A (Low) ⇒ 𝑊 =𝑤 .𝐿 𝑖 Industrialization Q B 2 - Wage in MS between A and B ⇒ A Q TS slope = 1 Both high and low equilibria... 1 Industrialization depends on Big Push F 0 L/N L i Further Examples of Multiple Equilibria Low level equilibrium traps: • Advantages of the incumbent. • Behaviour and norms - how move from a bad to a good equilibrium. • Linkages and the Big Push. • Inequality, multiple equilibria and growth. 14 Kremer’s O-Ring Theory • Vicious circle theory/poverty trap: multiple equilibria – why poor countries tend to stay poor. • The idea of strong complementarity – the O-ring (1986 Challenger accident). • Countries can get stuck, and with exceptionally low income. 15 Kremer’s Model: Basic Set-Up (1) • N tasks to produce an output or implement a production process. • Tasks can be ordered by level of skill 𝑞 (0≤𝑞≤ 1). •𝑞 either a kind of a quality index or the probability of completing the task successfully. • For example, car assembly – each task has to be completed successfully (assume also independence of mistakes). 16 Kremer’s Model: Basic Set-Up (2) • The production function: 𝒏 𝒚 =𝒒 ×. . . .×𝒒 ×𝑩 =�𝒒𝑩 𝟏𝒏𝒊 𝟏 = Strong complementarity • Assumptions: Risk neutrality (maximize expected value of profit), competitive labour markets, inelastic labour supply (independent from wage) Kremer’s Model: Illustration • Assume 6 workers: 3 with 𝑞 = 0.4 and three with 𝑞 = 0.8 in 2 firms • Assume one worker in each firm is trained (25% increase in 𝑞 of one worker) – Firm 1: y= (0.4)(0.4)(0.4) = 0.064 - (0.4)(0.4)(0.5) = 0.080 Increase is 0.016 – Firm 2: y= (0.8)(0.8)(0.8) = 0.512 - (0.8)(0.8)(1.0) = 0.640 Increase is 0.128 • Point value increase much higher in firm 2 (almost 8 times greater) : Virtuous circle .. • The more you upgrade, the better it pays (wages increase at an increasing rate) 19 Kremer’s Model: Implications • Firms tend to employ workers with similar skill level for their different tasks. • Workers performing same task earn higher wages in high-skill firm or developed countries. • Wages increase in 𝑞 at increasing rate. • Incentives to upgrade increase with skill level in firm. • Bottlenecks can reduce worker incentives to invest in skills. • International brain drain. • Economy-wide low-quality traps⇒ Industrial policy for quality upgrading. 20 Conclusion • Coordination failures can have far-reaching effects and high costs, such as outright failure to industrialize. • In many cases, they call for government interventions to overcome the resulting vicious circles of underdevelopment. But: – What about government failures? – Which types of government interventions (e.g. Lin and Chang 2009)? • Government failures and market failures are real, but public- and private-sector contributions to development are both indispensable.

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