Rational actors and organizational architecture

Why are some economics departments shrinking?

Here is a blog talking about the reduction in size of the Department of Economics at the University of Florida. It tries to use an analogy that treats Departments or Schools within a University as independent countries. Another approach, described here, argues that the reduction stems from a transfer price that is so low that the downstream unit wants to reduce the quantity produced and points out the incentives that exist when the transfer price is "too" high. 

As an economist, the news depresses me. U of F had an outstanding economics department. It makes me wonder about how best to structure the organization. Is a University best structured as a set of independent countries or should the University use a funding formula in which revenues accrue, at least partially, to the unit that paid the cost? If so, what is the best transfer price? Another option is for the Business Dean to apply the Coase Theorem and to ask the Dean of the College to pay for the positive externality the B-school is creating for the College. As an economist, I hope that the difference between the value of the economics offerings to the College and the sum of their incremental cost and the transactions costs is positive and that a mutually beneficial price exists.

Challenger

The Challenger disaster is a great example to illustrate how bad organizational structure contributes to bad decisions. Challenger exploded 73 seconds after liftoff on January 28th, 1986. The explosion killed Francis "Dick" Scobee (Commander), Michael Smith (Pilot), Judith Resnik (Mission Specialist), Ellison Onizuka (Mission Specialist), Ronald McNair (Mission Specialist), Gregory Jarvis (Payload Specialist), and Sharon Christa McAuliffe (Payload Specialist - Teacher in Space). Christa McAuliffe was slated to be the first teacher in space for the Teacher in Space Program. The accident occurred because O-rings between two sections of the booster rocket became brittle as a result of low temperatures the morning of the launch. The O-rings then allowed hot gases to escape, resulting in an explosion. (Preventing the accident is not “rocket science”. A former student told me that his engineering teacher explained accurately to the class the cause of the accident about 15 minutes after it occurred.)

1. What questions would you ask when trying to determine why the shuttle was launched in unsafe conditions?
2. Based on the answers and discussion in class, what solutions would you propose?

Watch the launch of the Challenger.

Remembering the mistakes of Challenger

Wikipedia has a good summary.

Here is another account of the decision to launch.

The schedule called for all contractors to recommend whether or not to proceed with the launch; level-4 contractors passed their recommendations along to their level-3 contractors, who in turn passed their recommendations along to their level-2 contractors. The level-2 contractors passed their recommendations along to mission control and the flight director there. Morton Thiokol was a level-4 contractor and reported to Marshall's Solid Rocket Booster Project, a level-3 contractor. “Temperatures for the next launch date were predicted to be in the low 20°s. This prompted Alan McDonald to ask his engineers at Thiokol to prepare a presentation on the effects of cold temperature on booster performance. [Alan McDonald  was Director of the Solid Rocket Motors Project for Morton Thiokol. NASA had contracted Morton Thiokol to build the Solid Rocket Booster used for shuttle launches.] … Thiokol's Engineering Vice President Bob Lund presented the conclusions and recommendations. … He read his recommendations and commented that the predicted temperatures for the morning's launch was outside the data base and NASA should delay the launch, so the ambient temperature could rise until the O-ring temperature was at least 53°F. … Marshall's Solid Rocket Booster Project Manager, Larry Mulloy, commented that the data was inconclusive and challenged the engineers' logic. A heated debate went on for several minutes before Mulloy bypassed Lund and asked Joe Kilminster for his opinion. [Joe Kilminster was an engineer in a management position at Morton Thiokol.] … Kilminster stood by his engineers. Several other managers at Marshall expressed their doubts about the recommendations, and finally Kilminster asked for a meeting off of the net, so Thiokol could review its data. … The managers seemed to believe the O-rings could be eroded up to one third of their diameter and still seat properly, regardless of the temperature. The data presented to them showed no correlation between temperature and the blow-by gasses which eroded the O-rings in previous missions. … Mason finally turned to Bob Lund and said, "Take off your engineering hat and put on your management hat." [Jerald Mason was a Senior Executive and Bob Lund was the Engineering Vice President, both at Morton Thiokol.] Joe Kilminster wrote out the new recommendation and went back on line with the teleconference. The new recommendation stated that the cold was still a safety concern, but their people had found that the original data was indeed inconclusive and their "engineering assessment" was that launch was recommended, even though the engineers had no part in writing the new recommendation and refused to sign it” (http://ethics.tamu.edu/ethics/shuttle/shuttle1.htm).

Organizations and People Involved

• Marshall Space Flight Center - in charge of booster rocket development
• Larry Mulloy - challenged the engineers' decision not to launch
• Morton Thiokol - Contracted by NASA to build the Solid Rocket Booster
• Alan McDonald - Director of the Solid Rocket Motors Project
• Bob Lund - Engineering Vice President
• Robert Ebeling - Engineer who worked under McDonald
• Roger Boisjoly - Engineer who worked under McDonald
• Joe Kilminster - Engineer in a management position
• Jerald Mason - Senior Executive who encouraged Lund to reassess his decision not to launch.