Abstract

Firms irms operate in complex environments: a list of the categories in which they need to make interrelated choices would include employee pay, pricing, product attributes, production technologies, and management. In turn, these decisions involve responding to characteristics that are often hard to measure or uncertain, such as those related to market characteristics, the productivity of individual inputs, and entrepreneurial ability. Due to the complexity of the environment, research that seeks to understand the behavior of firms based on observational data faces many challenges at uncovering causal relationships. In this paper, we illustrate how field experiments, guided by economic theory, can address these challenges and provide new answers to long-standing questions about firms: Do firm choices maximize profits subject to constraints? If so, which constraints bind and inform decision making in firms? If not, why are firms operating inside the frontier? In this paper, we review field experiments that provide preliminary answers to these questions and map directions for further research. We organize our discus-sion into two classes of work. The first is field experiments conducted within firms, in which the units of observation are workers or divisions of a firm. The theory behind many of these experiments views the firm as an organization, emphasizing agency problems. We discuss field experiments that shed light on solutions to the agency problem, from incentive pay to social pressure and nonmonetary rewards.