Decision-making in organizations: when to delegate and whom to delegate

A production process involves a principal and two privately informed agents. Production requires coordinated decision making. It might be carried in a centralized organization or through delegated contracting in a hierarchical structure. We compare the performance of different organizational structures when renegotiation of initial contracts is possible. We show that delegated contracting always dominates centralization if the downstream contract between the agents is observable. Contracting (resp. control) should be delegated to the agent with the least (resp. most) important information. If downstream contracts are not observable, we obtain a tradeoff between centralization and delegation.     

Rational Inefficiencies

In this paper, we suggest that inefficiency may be an indirect, on-the-job compensation to agents in an organization. We show how to use actual production data to reveal the trade-offs between different inefficiencies (slacks). Moreover, we discuss how to use this to improve productivity analysis as well as decision making and incentive provisions in organizations.     

Optimal timing of management turnover under agency problems

We explore the timing of the replacement of a manager as an important incentive mechanism, using a real options approach in a situation where the timing of the decision to replace the manager is related to a major change in a firm's strategies that involves spending large amounts of various sunk adjustment costs. Using a continuous-time agency setting, we show that when renegotiation is not possible, the early replacement of the manager of a lower quality project (prior to the first-best trigger level) occurs only if a moral hazard or an adverse selection problem exists. We also indicate that the possibility of renegotiation drastically changes the results.     

Credible collusion in multimarket oligopoly

This article refines an established explanation of how multimarket contact facilitates collusion when firms enjoy reciprocal advantages across markets: When there are reciprocal asymmetries between firms, multimarket contact allows them not only to develop spheres of influence, but also to implement attractively simple strategies that are subgame perfect and weakly renegotiation proof. Hence, collusive equilibria are supported by fully credible punishments. A significant implication is, multimarket contact involving reciprocal differences between firms may be more facilitating to their cooperative efforts than multimarket contact based on other factors. The article discusses existing empirical work as it relates to this implication. Copyright © 2007 John Wiley & Sons, Ltd.     

总分公司体制下保险公司合谋问题的激励研究

大型中资保险公司由于其庞大的总分公司结构，在总公司、内审部门与分公司间所形成的三层委托代理关系下常出现合谋现象。本文在利用多重委托代理模型的基础上，分析了合谋问题在大型保险公司的具体表现，以及不同状态下的激励水平。最终得出结论，大型保险公司中合谋问题存在并且严重，而最优激励水平应该是平衡报酬和惩罚。     

Efficient Consumer Altruism and Fair Trade Products

Consumers have shown a willingness to pay a premium for products labeled as “FT” and a preference for retailers that are seen to be more generous to their suppliers/employees. A FT product is essentially a bundle of a base product and a donation to the supplier (e.g., a coffee farmer). An altruistic rational consumer will only choose this bundle if doing so is less expensive than buying the base product and making a direct donation. For FT to be sustainable either in a competitive equilibrium or in a monopolistic environment this bundling must yield an efficiency. This efficiency is generated in the following context. A supplier’s investment reduces the retailer’s cost or boosts the final product’s quality, but this investment is not immediately observable and cannot be enforced, hence there exists a moral hazard problem. In this environment, the altruism of the consumer can facilitate a more efficient contract: by paying the supplier more the retailer can both extract more consumer surplus and increase the level of contracted investment, while preserving the supplier’s incentive compatibility constraint. We assess our model in the context of the coffee industry.     

Auditor independence,incomplete contracts and the role of legal liability

We develop a model in which there is conflict of interest between the management and the shareholders of an organization. Incompleteness of contracts prevents a simple contracting solution to this problem. We suggest that auditors can play a role in aligning the conflicting interests. However, this result is dependent on auditors maintaining independence from management. Again however, incompletenesses in contracting causes difficulties because it may be hard to ensure that auditors maintain this required independence. In this context, the imposition of potential legal liability (punishment) on the auditor, may be an important commitment mechanism for the auditors, making it credible that they will not collude with the management. In order to give our model institutional structure we study how this collusion may take place through the reappointment concerns of the auditor. In the reappointment game, we consider how legal liability levels could be chosen so that it becomes credible to expect that auditors will not implicitly collude with management and provide a low duty of care.     

Reject and renegotiate: The Shapley value in multilateral bargaining

This paper investigates three distinctive and intuitive renegotiation bargaining protocols that all yield the Shapley value as the unique subgame perfect equilibrium outcome. These protocols, built on the multi-bidding procedure of Pérez-Castrillo and Wettstein (2001), allow more freedom in multilateral bargaining where rejected players can further negotiate and form coalitions. The self-duality of the Shapley value plays a key role in the second and third results. Moreover, these renegotiation protocols allow an actual play along the equilibrium path to restore the Shapley value in case of a ‘mistake’ made before.     

Asset sale,debt restructuring,and liquidation

This paper considers a dynamic model in which shareholders of a firm in distress have a choice of whether the firm proceeds to debt restructuring or direct liquidation at an arbitrary time. In the model, we show the following results. Fewer asset sales, lower financing, debt renegotiation, and running costs, a lower premium to the debt holders, a lower cash flow volatility, and a higher initial coupon increase the shareholders׳ incentive to choose debt restructuring to avoid full liquidation. In the debt renegotiation process, the shareholders arrange the coupon reduction and use equity financing to retire a part of the debt value to the debt holders. The timing of debt restructuring always coincides with that of liquidation without debt renegotiation. Most notably, the shareholders do not prefer asset sale in debt restructuring even if they face high financing costs. The possibility of debt renegotiation in the future increases the initial leverage ratio in the optimal capital structure.     

The Social Provision of Punishment and Incarceration

Standard economic theory proposes that public goods (equally available to everyone) will be underprovided by private markets. Individuals can benefit without having to pay, so there is little incentive to invest or manage resources efficiently. The punishment of criminals is an example of this, since everyone in a society benefits from reduced crime whether they pay to apprehend criminals or not. On that basis, it is widely presumed that governments must provide criminal justice services, including prisons. But the evidence in favor of that view is ambiguous. Stateless societies throughout history have found ways to maintain public order without ever building a prison. Nations with adequate social safety nets and a high degree of equality are also likely to rely on alternatives to incarceration. Strong forms of public goods theory, when applied to punishments and prisons, are shown to be false, since crime control does exist without a centralized state. Furthermore, the available evidence suggests that centralized government provision and management can also suffer inefficiencies from overproduction. Only comparative institutional analysis can speak to the efficiency potentials of punishment, wherein the costs of underproduction are assessed against the likely consequences of overproduction.     

On optimality of illegal collusion in contracts

Illegal collusion is a widespread phenomenon all around the world. Yet, models of hierarchical agency relationships tend not to predict collusion. This paper demonstrates that a natural requirement of interim efficiency suffices for collusion to appear in equilibrium in a simple standard setting. The optimal extent of collusion depends on the efficacy of the legal system. When the transaction costs associated with illegal deals are small enough, inducing some illegal collusion between the agent and his supervisor increases the principal's payoff. Received: 9 December 1996 / Accepted: 11 April 1998     

Endogenously Asynchronous Entries into an Uncertain Industry

We model and analyze a priori symmetric duopoly where supply quantity adjustment is slow and time-consuming. The state of demand is ex ante uncertain, and becomes observable a certain time period after at least one firm's entry. We characterize those conditions under which sequential entries can be endogenously chosen either as an asymmetric pure-strategy equilibrium or as a consequence of a symmetric mixed-strategy equilibrium. Also, in the limit where information revelation is infinitely fast (i.e., the time period it requires becomes infinitesimally short), the expected waiting time until the first entry does not necessarily become proportionately short, whilst the time interval between the leader's entry and the follower's entry does become infinitesimally short. This suggests that chronologically nearly simultaneous entry should not necessarily be interpreted as counterevidence against leader-follower relations. In addition to equilibrium comparative statics, we also analyze some of the welfare issues associated with strategic timing of entry.     

Manufacturer collusion: Strategic implications of the channel structure

We investigate how the structure of the distribution channel affects tacit collusion between manufacturers. When selling through a common retailer, we find—in contrast to the conventional understanding of tacit collusion that firms act to maximize industry profits—that colluding manufacturers strategically induce double marginalization so that retail prices are above the monopoly level. This lowers industry profits but increases the profit share that manufacturers appropriate from the retailer. Comparing common distribution with independent (exclusive) distribution, we show that the latter facilitates collusion. Despite this result, common retailing leads to lower welfare because a common retailer monopolizes the downstream market. For the case of independent retailing, we also demonstrate that contract offers that are observable to the rival retailer are not necessarily beneficial for collusive purposes.     

Contract stability in European road infrastructure PPPs: how does governmental PPP support contribute to preventing contract renegotiation?

In the last decade a considerable number of PPP contracts in Europe turned out to be instable and were renegotiated. This paper studies which combinations of conditions in terms of macro-level business environment and governmental PPP support and at project-level (remuneration scheme, risk allocation, project age and contract duration) contribute to avoid contract renegotiation, by conducting a qualitative comparative analysis of twenty five European road infrastructure projects. Results show that although the broader macro-level business environment has a clear contribution, contract stability can benefit from an availability-based remuneration scheme and a well-developed governmental PPP support in combination with other conditions.     

Heterodox Economics and the Scientist's Role in Society

The present work starts from a simple question: Why should a state pay the salary for an academic researcher in economics? Generally speaking, research should be financed because it is useful for socioeconomic development; knowledge represents a productive input and it increases social welfare. How much does this argument hold for economic knowledge? Is economics helping in improving wealth and well‐being? This article will show how the incentive structure and the internal organization of the discipline prevent a positive answer to such questions. In fact these institutions do not necessarily stimulate researchers to understand economies, and economics completely neglects its role in shaping values because of its pretense of objectivity. Two solutions are proposed: more pluralism and a wider capacity to discuss with the whole society.     

Managerial incentives for process innovation

Cost‐reducing investments by firms are often not publicly observable. This lack of observability would preclude a strategic use of process innovation. However, we show that an observable and verifiable contract that provides direct monetary incentives for cost reductions — an innovation incentive contract — can act as a strategic commitment device. Our model predicts that manager‐led firms are more innovative than owner‐led firms and that these contracts become less prevalent as product market competition intensifies. Both predictions are consistent with recent empirical evidence. Copyright © 2008 John Wiley & Sons, Ltd.     

Delegation and strategic incentives for managers in contests

Owners usually want their managers to maximize profits. As the literature on strategic delegation has shown it may be beneficial to owners to put a positive weight on sales in the optimal linear incentive scheme for managers to make them behave more aggressively in the market. This paper shows that if the competition between the managers can be characterized as a contest, owners may induce their managers to maximize sales. Moreover, there is a first‐mover advantage for owners when choosing their incentive schemes. If delegation is endogenous the type of contest will determine whether all owners delegate their decisions to managers or not. Copyright © 2002 John Wiley & Sons, Ltd.     

On the screening power of incentive schemes

We demonstrate the screening power of incentive schemes. The model is a synthesis of a signaling model and the principal-agent problem. A non-cooperative stage where the agent may send a signal precedes a contractual stage where the agent serves a principal under an incentive scheme. After establishing the existence of a revealing equilibrium in an environment with long-lived principals and overlapping contracts, the paper discusses the implications for efficiency of the distribution of surplus. Finally, it is shown that under commitment the agency relationship may serve self-selection purposes and hence reduce the need of costly signaling.     

An extensive form solution to the adverse selection problem in principal/multi-agent environments

When agents have quasi-linear preferences, every incentive compatible social choice function can be implemented by a simple extensive form mechanism, even if agents are allowed to use mixed strategies. The second stage of the mechanism, which is used to elicit the agents' true preferences, is not reached in equilibrium; it gives agents strict dominant strategies, so equilibrium outcomes are not sensitive to agents' beliefs off the equilibrium path. This solves the multiple equilibrium problem of a principal facing several agents: the mechanism implements any solution to the principal's second best maximization problem. The specification of incentive compatibility constraints in the principal's problem presupposes a precise knowledge of the agents' beliefs. However, the above mechanism can be modified to implement the principal's second best (to within arbitrarily small perturbations of transfers), regardless of the agents' conditional beliefs. Received: 30 April 1997 / Accepted: 16 September 1997     

Observability and Sorting in a Market for Names

Can firm names be tradeable assets when changes in name ownership are observable? Earlier literature focuses on trading of firm names when trading is not observable to the consumer. Yet, casual empiricism suggests that shifts in name ownership are often publicly known. This paper studies how firm names can be traded even under full observability. In equilibrium, even when consumers see a reputed name being divested they continue to trust it and so, these names are tradeable. I further demonstrate an appealing “sorting” property of these equilibria. Competent firms can separate themselves by buying valuable names, and incompetent firms can give themselves away by using worthless names.