Getting Incentives Right (and Learning About it in B-School)

This post is directed at first-year MBA students at the David Eccles School of Business. For the rest of you... Maybe you should consider becoming a first-year MBA student at the David Eccles School of Business.

Read this article from yesterday's Wall Street Journal. I don't agree with everything that's written here. I do agree that bad incentives are the central problem that led us into the financial mess. But I don't agree that business schools don't teach students how to think in a structured, careful way about the provision of incentives in modern firms.

Because this is what I do.

I know you didn't see me do any of it in the fall. Unfortunately, that core micro course you took is way too short. Plus there are some basic micro principles (supply/demand/elasticity/etc) that have to be covered. So I don't get to do any incentives stuff there.

But let me tell you what I'm doing in the Fin 6250 elective this fall. I'm teaching essentially the same course I developed and taught for ten years at the Kellogg School of Management at Northwestern. At Kellogg, the course was called "Strategy and Organization," and the emphasis was on how you design an organization to achieve strategic objectives. I'm downplaying the strategy angle a bit (but not completely) because I'm in finance department not strategy here. But we're still going to start from the notion that in order to achieve different strategic objectives, you need to change the actions of individual people inside your firm. And individuals' actions in a firm are determined (at least in part) by the organization surrounding those individuals, and the resulting incentives.

That is, we're going to undertake a serious study of the economics of incentives. We're going to use that to develop economic theories of optimal organization. And we're going to link that to ideas from strategy, finance, and accounting.

Economics isn't, of course, the only useful way to think about these issues. But I think it provides a practical and useful perspective, and I'll hope to convince you of it in the fall.

I'm not really that comfortable blowing my own horn. But I've come to the unfortunate realization that marketing oneself is actually sort of important. So here's the hard sell: Kellogg is one of the top management schools in the world, and this elective was one of the most popular elective courses offered there. I picked up a slew of teaching awards there for this course. Students would save their points (electives were allocated using a points-based bidding system) and blow all of them to get into this course. The course is at the leading edge of what economists know about incentives and organization.

Teaching micro to MBAs? I could take it or leave it. Teaching how to analyze incentives and organization using economics? That's what gets me going.

If you think you might run an organization (for-profit or not) in your career --- and if you don't think you might do this, then why are you getting an MBA? --- you should take this course.

It's suitable for Masters of Accounting, and Masters of Finance, and Masters of Public Policy, and ... well, you can see I get excited about this stuff... So look into it.