Efficient Delegation by an Informed Principal

Motivated by examples from the automobile industry, insurance, retailing, and multinational strategy, we study an organizational structure we refer to as "partial delegation." In a bargaining problem between an informed party and an uninformed party, partial delegation involves the informed party delegating bargaining to an agent while retaining control of its private information. We show that partial delegation enables the informed party to earn information rents without creating quantity distortions. First‐best quantities are traded in equilibrium. We argue that partial delegation allows an informed party to implement efficient trade with outside parties by endogenously improving its bargaining power.     

Bilateral Delegation in Duopoly Wage and Employment Bargaining

We study bilateral delegation in wage and employment bargaining between firms and unions in a Cournot duopoly. Incentive delegation creates frictions for each party between its objectives of within‐firm rent extraction and market/job stealing from the rival firm. The net effect is restraint in production, resulting in a larger bargaining pie. But each player's payoff will be inversely related to his bargaining power. We also show that if players are given a choice to delegate, they will not resort to delegation when their bargaining power is sufficiently high. This is in contrast to the scenarios commonly assumed in many models. Copyright © 2016 John Wiley & Sons, Ltd.     

The Bargaining–sales‐delegation Game

This article revisits the managerial delegation literature led by Vickers ( 1985 ), Fershtman and Judd ( 1987 ) and Sklivas ( 1987 ) by introducing a bargaining mechanism between owners and managers over managerial contracts. It shows that the degree of bargaining interacts with the extent of product differentiation in determining whether the sub‐game perfect Nash equilibrium is sales delegation or profit maximisation. In contrast with the classical result, no sales delegation emerges and the typical prisoner's dilemma of the managerial delegation literature is solved. This holds in both contexts of Cournot and Bertrand rivalries. The article also provides results for the more general cases with heterogeneous managerial bargaining power and endogenous decisions of the owners regarding the bargaining power of the manager that should be or not be hired in a firm. Copyright © 2016 John Wiley & Sons, Ltd.     

Strategic managerial incentives under adverse selection

We extend the strategic contract model where the owner designs incentive schemes for her manager before the latter takes output decisions. Firstly, we introduce private knowledge regarding costs within each owner–manager pair. Under adverse selection, we show that delegation involves a trade‐off between strategic commitment and the cost of an extra informational rent linked to decentralization. Which policies will arise in equilibrium? We introduce in the game an initial stage where owners can simultaneously choose between control and delegation. We show that if decision variables are strategic substitutes, choosing output control through a quantity‐lump sum transfer contract is a dominating strategy. If decision variables are strategic complements, this policy is a dominated strategy. Further, two types of dominant‐strategies equilibrium may arise: in the first type, both principals use delegation; in the second one, both principals implement delegation for a low‐cost manager and output control for a high‐cost one. Copyright © 2005 John Wiley & Sons, Ltd.     

A property rights approach to legislative delegation

This paper applies the property rights theory to study both positive and normative aspects of legislative delegation in a setup where interest groups directly influence lawmaking by initiating regulatory bargaining. A self-interested legislature choosing between the direct exercise of its legislative authority and delegation to an administrative agency must therefore trade off the value of bureaucratic competence against bureaucratic drift and, importantly, loss of control over bargaining. Our analysis, first, clarifies when the legislature’s choice between delegation and no delegation is socially efficient or socially inefficient; second, highlights the role of political bargaining and shows that precluding interest group influence through bargaining may actually increase the scope for socially inefficient outcomes; and, third, illustrates the model’s predictions in light of selected stylized facts and the practice of scant empirical work on legislative delegation.     

Bargaining over managerial contracts in delegation games: managerial power,contract disclosure and cartel behavior

Modern corporate governance codes include clauses requiring the disclosure of managerial compensation. Such codes have been installed to protect shareholders' interests. In this paper, we explore the impact of such disclosure on consumer welfare. We consider two‐stage delegation games in which owner‐shareholders negotiate about compensation with their managers in the game's first stage. At the end of the first stage, the managerial compensation contract outcomes of the bargaining process are publicly announced. In the second stage, Cournot competition evolves. We prove that sales delegation generates equilibria radically different from relative performance delegation. Using classical Cournot as the benchmark, contractual bargaining over sales compensation gives tougher product market competition—and hence higher consumer surplus. The opposite holds true for relative performance delegation. Then, cartel behavior is promoted, reducing consumer surplus. Copyright © 2007 John Wiley & Sons, Ltd.     

The relationship between product market competition and unemployment with profit sharing

We investigate the implications of product market imperfections on negotiated wages and equilibrium unemployment under profit sharing. We show that intensified product market competition reduces equilibrium unemployment in a strictly monotonic way when the trade union's bargaining power exceeds the profit share. If the profit share exceeds the trade union's bargaining power, the effect of product market competition is ambiguous: there is a threshold for the benefit–replacement ratio above (below) which intensified product market competition increases (decreases) equilibrium unemployment. The profit share and the union's bargaining power affect the wage mark-up, and thereby equilibrium unemployment, in different directions.     

Endogenous timing of managerial delegation contracts in a unionized duopoly

In a multiple‐stage duopoly game with strategic delegation and unionized labor market, this paper analyzes whether firms' owners decide managerial incentive contracts sequentially or simultaneously. When firms compete in quantities, firms' owners can choose incentive contracts simultaneously or sequentially, depending on the unions' relative bargaining power and the degree of product differentiation. Instead, when firms compete in prices, firms' owners set incentive contracts sequentially with substitute goods and simultaneously with complement goods.     

Manager‐Union Bargaining Agenda Under Monopoly and with Network Effects

This paper investigates the bargaining agenda selection in a unionised monopoly with managerial delegation (MD). In contrast to the conventional wisdom, monopoly profits with MD under sequential Efficient Bargaining (SEB) exceed those under Right‐to‐Manage (RTM), while the union can prefer RTM to SEB: paradoxically, a conflict of interests between the parties may still exist but for reversed choices of the agenda. Consumption externalities change the picture. The monopolist still prefers SEB; however, provided that network effects are sufficiently strong, the union prefers SEB even for a relatively low bargaining power. Thus, the parties endogenously choose the SEB agenda which is also Pareto‐superior. Copyright © 2016 John Wiley & Sons, Ltd.     

Changing the Rules of the Game

Abstract

This article examines the impact of privatization on the relative bargaining strength of management and trade unions. Findings are based on a study of Ireland's largest telecoms provider, Eircom, which has been privatized since 1999. The privatization of Eircom adopted a stakeholder approach, under which employee share-ownership and management–union partnership played an important role in firm restructuring. Findings show that despite this approach privatization has resulted in a significant decrease in the perceived bargaining strength of unions and an increase in the perceived bargaining strength of management.     

Consumer Standards as a Strategic Device to Mitigate Ratchet Effects in Dynamic Regulation

Strategic delegation to an independent regulator with a pure consumer standard improves dynamic regulation by mitigating ratchet effects associated with short‐term contracting. A pure consumer standard alleviates the regulator's myopic temptation to raise output after learning the firm is inefficient. Anticipating this tougher regulatory behavior, efficient firms find it less attractive to exaggerate costs. This reduces the need for long‐term rents and mitigates ratchet effects. A welfare standard biased toward consumers entails, however, allocative costs arising from partial separation of the firms' cost types. A trade‐off results, which favors strategic delegation when efficient firms are relatively likely.     

R&D spillovers and strategic delegation in oligopolistic contests

Considering oligopolistic contests with R&D spillovers and strategic delegation three results can be obtained: (1) There exist multiple asymmetric equilibria where one owner highly favors sales as a basis for his manager's incentives which drives the other firm out of the market. (2) If R&D spillovers are zero, a managerial firm will have a strong strategic advantage when competing with an entrepreneurial firm. If both owners endogenously decide about delegation, each owner's dominant strategy will be to delegate, given that the manager's reservation value is not too large. (3) If R&D spillovers are maximal, collusive market outcomes become very likely, which makes strategic delegation less important. Copyright © 2004 John Wiley & Sons, Ltd.     

The effects of bargaining power on trade credit in a supply network

We develop a multi-tier supply network model, rooted in social network theory, to evaluate the effect of bargaining power on trade credit and to track the effect of buyers' trade credit on suppliers' trade credit. We apply social network analysis to measure companies' bargaining power in the supply network of Hennes & Mauritz AB (H&M, the Swedish clothing retailer). The results show that the buyer's bargaining power significantly affects the choice of trade credit, and that the supplier's “upstreamness” is significantly associated with its trade credit. We find limited evidence to support the notion of a financial bullwhip effect, a result that merits further research, since this study is limited to the network of one company up to its fourth tier of suppliers in one financial year. Our results can be applied by companies seeking to control their cash flow and, therefore, the financial pressure within their supply network. This study contributes to the literature by bringing social network measures into the buyer–supplier financial flow, as well as offering one of the first empirical examinations of the propagation of financial pressure in a multi-tier supply network.     

The collective bargaining of flexicurity: A case for sector‐level analysis? The Italian chemical and metalworking sectors compared

Although employment relations in Europe have long been seen as a factor of rigidity, limiting managerial discretion and adaptability, in the last 30 years, they have witnessed a trend towards decentralisation of collective bargaining and negotiations increasingly centred on flexibility–security trade‐offs between employers and employees. Research on the contribution of collective bargaining to the so‐called flexicurity has mostly focused on national‐level institutional arrangements. In this article, we contend that meso‐level differences need to feature more prominently in the debate. Our comparison of two sectors in the same country (chemicals and metalworking in Italy) shows that decentralisation has divergent effects on flexicurity issues depending in particular on differences in market structures and on depth of bargaining. The interplay between these two factors affects what we refer to as procedural security, which we view as important in ensuring sustainable trade‐offs between flexibility and security.     

Bargaining over Managerial Contracts in Delegation Games: The Generalized Oligopolistic Case

The main purpose of this paper is to disclose the properties of the equilibrium outcomes in the differentiated‐products model with two stages: (i) owner‐shareholders negotiate managerial compensation with their managers that comprises their profits and sales (sales delegation) and (ii) they engage in their market competition. The other purpose of this paper is to study the differentiated goods model in which an owner bargains the managerial compensation with her/his manager that comprises her/his profit and her/his rival's profit (relative performance delegation). We further investigate the situation wherein the firm with sales delegation and the firm with the relative performance delegation coexist. Copyright © 2012 John Wiley & Sons, Ltd.     

The equivalence of supporting software delegation and sales delegation

This paper considers a duopoly market with horizontally differentiated system goods to examine system owners' behaviors under supporting software delegation, in which owners of system firms use varieties of supporting software, coupled with profit, to evaluate their managers' performance. Supporting software delegation seems to induce managers to act more aggressively in price competition than sales delegation does; however, we prove that if two systems are compatible and the varieties of supporting software are determined by hardware owners' overall expenditure amount on software, then supporting software delegation is equivalent to sales delegation. Owners of system firms induce their managers to act less aggressively in hardware price competition by offering contracts with a negative weight on varieties of supporting software under supporting software delegation. We find that stronger network externalities do not reverse system owners' contracting behaviors under supporting software delegation. Finally, it is worth mentioning that hardware technologies are static in this paper. In other words, dynamic changes such as hardware evolution are not considered in our analysis.     

Optimal delegation choices in the presence of an incongruent performance measure and double moral hazard

An owner‐manager can delegate two tasks to an agent. A time constraint prevents him from completing both tasks at first‐best levels. He can (a) perform both tasks personally to the extent possible, (b) delegate one task to an agent, or (c) delegate both tasks. Agency costs arise from a congruity problem, a double moral hazard problem, and a risk and incentive trade‐off. Delegation becomes more favorable the stronger the time constraint. Once delegation is preferred, the optimal extent of delegation depends on the relation of sensitivity to productivity ratios in both tasks. Agency costs not necessarily increase in delegation level.     

Brand Management and Strategies Against Counterfeits

In this paper, I provide a theory for brand‐protection strategies to reduce counterfeiting under weak intellectual property rights. My theoretical framework has general implications for endogenous sunk cost investments as a means of deterring counterfeiters. My model incorporates two layers of asymmetric information that counterfeits can incur: counterfeiters fooling consumers and buyers of counterfeits fooling other consumers. Brands have a number of tools at their disposal to maintain a separating equilibrium in the face of counterfeits. One of the theoretical predictions of this study is that counterfeit entry induces incumbent brands to introduce new products. This helps to explain the innovation strategies that authentic firms employ in response to entry by counterfeiters in practice. Authentic prices rise if and only if the counterfeit quality is lower than a threshold level. In addition, the model demonstrates how authentic producers could invest in self‐enforcement to increase counterfeiters' incentives to separate themselves from brands. Better channel management through company stores and other costly devices are forms of nonprice signals and complement a company's own enforcements against counterfeits. These predictions are validated using unique panel data collected from Chinese shoe companies covering the years 1993–2004. Data further reveal that companies with worse relationships with the government invest more in various self‐enforcement strategies, which are effective in reducing counterfeit sales, and that the set of strategies are complements rather than substitutes for each other.     

Upstream conduct and price authority with competing organizations

We characterize the degree of price authority that competing upstream principals award their downstream agents in a setting where these agents own private information about demand and incur nonverifiable distribution costs. Principals cannot internalize these costs through monetary incentives and design “permission sets” from which agents choose prices. The objective is to understand the forces shaping delegation and the constraints imposed on equilibrium prices. When principals behave noncooperatively, agents are biased toward excessively high prices because they pass on distribution costs to consumers. Hence, the permission set only features a price cap that is more likely to bind as products become closer substitutes, in sectors where distribution is sufficiently costly, and when demand is not too volatile. By contrast, when principals behave cooperatively, the optimal delegation scheme is richer and more complex. Because principals want to charge the monopoly price, the optimal permission set features a price floor when the distribution cost is sufficiently low, it features instead full discretion for moderate values of this cost, and only when it is high enough, a price cap is optimal. Surprisingly, while competition (as captured by stronger product substitutability) hinders delegation in the noncooperative regime, the opposite occurs when principals maximize industry profit.