Delegation of information verification

An agent may manipulate information when transmitting it to the principal. A direct response to this problem is to verify the information. The paper explores a situation where the principal engages in information verification herself or alternatively delegates it to the agent. The paper finds that delegated verification can be optimal if the agent has to expend costly effort to acquire information before verifying it. Delegated verification promotes the agent's incentive for information acquisition. The paper also finds that delegated verification is more likely to be optimal if the agent is more biased.     

Trading between agents for a better match

This paper studies externalities that arise when agents can trade outcomes ex post. I show that when agents can trade outcomes ex post, principals are incentivized to contract with agents ex ante to reduce ex post transfers to outside agents with whom the principals do not directly contract. This causes principals to offer agents piece-rates that are inefficiently low and lower than the piece-rates they would offer if trading was not allowed. Although trading reduces an agent's effort and could increase the agent's outside option of rejecting a principal's ex ante contract, principals ultimately gain from allowing ex post trading because such trading results in outcomes that better match their tastes.     

THE QUALITY OF INFORMATION AND INCENTIVES FOR EFFORT*

We study the relationship between the precision of information about the performance of an agent in a market, and the incentives this agent has for exerting effort to produce high quality. We show that this relationship can be nonmonotonic. There exists an efficient plausible equilibrium that induces a threshold beyond which any further improvement in the precision of information weakens the agent's incentive to produce high quality. Accordingly, both very accurate and very inaccurate signals about the agent's performance may destroy its incentive to exert effort. A few applications of this result are discussed.     

Price Discrimination with Demarketing

We study how demarketing interacts with pricing decisions to explain why and when it can be employed as the seller's optimal strategy. In our model, a monopolistic seller offers different price‐quality bundles of the product. A consumer's preference is private information. With demarketing, consumers must make a costly effort to purchase and/or utilize the product, whereas with marketing, the seller instead makes the effort so that the consumer's purchasing decision is independent of the cost of effort. Our result suggests that, for small or large effort costs, it is optimal for the seller to engage in marketing. For intermediate effort costs, however, demarketing can be optimal. With demarketing, the seller induces only the consumers with high valuation to make transaction effort. By doing so, the seller can price discriminate more effectively, thus extracting more surplus. We extend our analysis to the case where the seller can offer special deals through exclusive sales channels along with demarketing. Then, demarketing can be optimal even for large costs of effort.     

Accept or reject? An organizational perspective

This paper compares the relative performance of different organizational structures for the decision of accepting or rejecting a project of uncertain quality. When the principal is uninformed and relies on the advice of an informed and biased agent, cheap-talk communication is persuasive and it is equivalent to delegation of authority, provided that the agent's bias is small. When the principal has access to additional private information, cheap-talk communication dominates both (conditional) delegation and more democratic organizational arrangements such as voting with unanimous consensus.     

Per unit vs. ad valorem royalties under asymmetric information

We study an inside patent holder's optimal licensing policy when it has imperfect information about the value of the patent to its rival. The patent holder can choose any two-part licensing fee with either per unit or ad valorem royalties. We demonstrate that the equilibrium will be either a fully separating contract with different per unit royalty rates, or a contract with a single ad valorem royalty that excludes a high cost rival. Fixed fees will not be used. The presence of asymmetric information uniquely drives the per unit royalties that otherwise would not be adopted. Per unit royalties always generate higher social welfare than ad valorem royalties.     

Partial monitoring,adverse selection,and the internal efficiency of the firm

The paper investigates an adverse selection model with monitoring of managerial effort. In contrast to the literature, we assume that the manager can be punished only if his effort is below a certain level that is monitored by the principal. Surprisingly, the optimal labor contract may induce an equilibrium effort which is lower than in the standard model without monitoring. This result holds for any discrete distribution of managerial types. In the continuous type case, the optimal contracts for high-quality (low-quality) managers are purely output-dependent (effort-dependent).     

Effort rewarding incentive mechanisms for public enterprise managers

Management incentive schemes leading to welfare optimal pricing and efficient production of public enterprises have so far been mainly concerned with the information advantages that public enterprise managers hold over their supervising government or central planning agency. Managers under these schemes are induced to improve their firm's performance in adjustment processes which in the limit lead to optimal firm decisions. Such managers are supposed to be income maximizers disregarding any personal effort which could influence their performance and utility. In this paper I show that two incentive schemes recently proposed by Tam (1981) and Finsinger and Vogelsang (1982) can also help to induce managers to provide an optimal level of effort. Here effort is assumed to reduce managers' utility and the firm's costs. The result depends crucially on myopic managerial utility maximization. Once managers maximize the discounted value of future utility levels they will deviate from the optimal behavior. Under Tam's scheme, this can hold independent of the optimal effort level. Under the Finsinger-Vogelsang performance index managers will always show suboptimal effort levels in a steady state equilibrium, because the index only rewards welfare improvements.Effort, however, has to be rewarded even with no improvement in behavior. An improved performance index, which provides cumulative rewards is shown to be strategy proof and lead to a welfare optimum. This reward structure basically treats managers as if they were private entrepreneurs. It looks extremely generous in that it gives managers the fruits of all costs reductions due to increases in effort. Suggestions are made to mitigate this income distributional impact.     

Flexible Wage Contracts,Temporary Jobs,and Firm Performance: Evidence From Italian Firms

This study focuses on the effects of decentralized wage schemes and temporary forms of employment on firm performance. The effect of monetary incentives on workers' effort and firm performance is a central topic in economics. According to the principal‐agent paradigm, firms (the principal) have to link employees' remuneration schemes to any verifiable indicator of performance to avoid opportunistic behavior. The empirical evidence shows that financial incentives have the potential to exert strong effects on indicators of firm performance, such as productivity and worker absenteeism, although the degree of effectiveness of such schemes varies significantly according to the institutional/economic context in which firms operate. From both a theoretical and empirical point of view, the prediction on the effects of temporary types of employment on effort and productivity is less neat. In light of these considerations, this study uses a sample of Italian firms to provide further empirical evidence on whether and to what extent performance‐related pay schemes and contract flexibility affect workers' effort (in terms of absenteeism) and, in turn, firm productivity. These effects are analyzed for different types of workers (white collar vs. blue collar), working in workplaces characterized by a different degree of uncertainty and risk and in firms operating in different economic and institutional settings. Our results show that wage flexibility has a significant effect on effort and then on firm's productivity and that white‐collar workers are more responsive to monetary incentives than blue‐collar workers. Moreover, the presence of a large share of temporary contracts, implying a lower dismissal probability for permanent workers and a deterioration of the working environment, appears to reduce workers' motivation and effort.     

Disagreement and informal delegation in organizations

To investigate delegation decisions within organizations, we develop a principal-agent model in which the principal can only informally delegate authority to the agent and the parties openly disagree with each other in the sense of differing prior beliefs about the optimal course of action. Our analysis shows that the degree of disagreement determines what kind of delegation policy the principal can commit to and this, in turn, alters the agent’s effort for information acquisition. Notably, at moderate degrees of disagreement, conditional delegation may arise in equilibrium, whereby the principal credibly commits to allowing the agent to exercise his authority only if he generates additional information about the optimal action. Further, we discuss two extensions in which the principal undertakes an investment that reduces the agent’s cost of acquiring information, and the agent discloses his private information strategically.     

Salesperson influence tactics and the buying agent purchase decision: Mediating role of buying agent trust of the salesperson and moderating role of buying agent regulatory orientation focus

Little is known about antecedents of salesperson influence tactic usage or how and which influence tactics impact buying agent purchase decisions. To aid such understanding, we draw from the relationship selling literature, and both regulatory fit and focus theories, to propose a novel theoretical framework and test hypotheses. The study's findings, derived by applying the critical incidence methodology to a heterogeneous dataset of buying agents (n > 200) representing small and medium enterprises and acting as key informants on salespeople, show that: (i) salesperson influence tactics heterogeneously explain the buying agent's trust of the salesperson, (ii) trust of the salesperson serves as a mechanism through which influence tactics impact the buying agent's purchase decision, (iii) buying agent's regulatory orientation moderates the relationship between salesperson influence tactics and buying agent's trust of the salesperson, and (iv) salesperson regulatory orientation predicts a salesperson's use of particular influence tactics. The article concludes with a discussion of the practical and theoretical implications of the research.     

The value of transparency in multidivisional firms

We study internal incentives, transparency and firm performance in multidivisional organizations. Two independent divisions of the same firm design internal incentives, and decide whether to publicly disclose their performances. In each division a risk-neutral principal deals with a risk-averse (exclusive) agent under moral hazard. Each agent exerts an unverifiable effort that creates a spillover on the effort cost of the other agent. We first study the determinants of the optimal principal-agent contract with and without performance transparency. Then, we show how effort spillovers affect the equilibrium communication behavior of each division. Both principals commit to disclose the performance of their agents in equilibrium when efforts are complements, while no communication is the only equilibrium outcome when efforts are substitutes.     

Conflicts of interest and agent heterogeneity in buyer brokerage

This article investigates the incentives of agents working with buyers (buying agents) under the fixed percentage commission system and the implications on housing market outcomes. Our model shows that the absence of a binding contract creates a risk of losing clients for buying agents, which helps mitigate the conflict of interest between buying agents and their clients. Both the buying agent's prediction accuracy regarding their client's reservation prices and the level of tolerance given by the buyer to the buying agent affect the binding force. Results from simulations and empirical analyses using house transactions in Canada support our model predictions.     

Aggregate Information and Organizational Structures*

We study information flows in an organization with a top management (principal) and multiple subunits (agents) with private information that determines the organization's overall efficiency. Under centralized communication, eliciting the agents' information may induce the principal to manipulate aggregate information, which obstructs an effective use of information. Under hierarchical communication, the principal concedes more information rent due to loss of control, but is able to use the agents' information more effectively. The trade-off between the organizational structures depends on the likelihood that the agents are efficient. Centralized communication is optimal when such likelihood is low. Hierarchical communication, by contrast, is optimal when it is high.     

Information Unraveling Revisited: Disclosure of Horizontal Attributes

This paper analyzes in a spatial framework how much information a seller discloses about the variety he sells when he faces a buyer with a privately known taste for variety. I identify an equilibrium in which, for each possible variety, the seller's optimal strategy consists of either fully disclosing the variety or disclosing how far it is from the buyer's expected taste. The set of varieties the seller fully discloses monotonically expands as the buyer's taste for variety becomes stronger. I show that this is the unique undefeated equilibrium. From a policy perspective, mandating full disclosure is socially harmful.     

Optimal nonlinear pricing by a monopolist with information ambiguity

We consider the optimal nonlinear pricing by an ambiguity-averse monopolist. The monopolist's subjective belief about the distribution of buyers is described by ϵ-contamination of an additive probability. We find that under a maxmin utility decision rule and with a continuum of buyers, ambiguity aversion leads to bunching at the bottom in the optimal contract, and the distortion at the bottom is reduced. Other high valuation buyers are offered the same quantity as in the case without ambiguity, but they get a greater discount.     

‘Keep out’ signs: the role of deterrence in the competition for resources

To explain resource heterogeneity, past research focuses on how rivals' resources are hidden from firms and firms accordingly have difficulties accessing them. We argue that resource heterogeneity may also arise when firms are deterred from a technological space upon being shown what resources rivals already possess within that space. To illustrate this deterrence effect, we use patent reexamination certificates, which indicate strategic stakes within a technological space without materially disclosing additional details of the underlying technologies and hence avoid the confounding effect of attracting competition through disclosure. We demonstrate how rivals' reexamination certificates within a technological space induce a firm to subsequently allocate less inventive effort in that space, based on two mechanisms—indications of rivals' developmental speed and exclusionary ability. We further develop these two mechanisms by arguing that the deterrence effect is stronger when rivals' speed is enhanced by their downstream capabilities, or when rivals' exclusion is enhanced by their litigation experiences. Findings suggest that a firm's path of resource accumulation evolves through avoidance of rivals' paths, and deterrence may constitute a viable alternative theory of resource heterogeneity. Copyright © 2010 John Wiley & Sons, Ltd.     

The double‐edged effect of knowledge acquisition: How contracts safeguard pre‐existing resources

Research summary : Acquiring knowledge on a partner's pre‐existing resources plays an important yet ambiguous role in collaborative relationships. We formally model how contracts trade off productive and destructive uses of knowledge in a buyer‐supplier relationship. We show that, when the buyer's pre‐existing resources are vulnerable to the revelation of sensitive knowledge, the supplier overinvests in knowledge acquisition as it expects to use the knowledge as a threat in price negotiations. A non‐renegotiable closed‐price contract prevents such overinvestment and reduces the supplier's ability to expropriate the buyer ex post. Our results extend to the cases of renegotiable closed‐price contracts, repeated interactions between a buyer and a supplier, and the use of nondisclosure policies. We draw theoretical, empirical, and managerial implications from our model. Managerial summary : This study yields new insights regarding the use of contract design in protecting pre‐existing, nonrelationship specific assets in buyer‐supplier arrangements. Anecdotal examples illustrate the “dark side” of these arrangements where opportunistic suppliers exploit knowledge of buyers' pre‐existing resources to seek rent and appropriate value. When a supplier is likely to act harmfully, a closed‐price contract that specifies the price of the supplier's component upfront may reduce the supplier's incentives to overinvest in acquiring and exploiting knowledge of the buyer's pre‐existing resources. As such, when a buyer's pre‐existing resources are highly valuable, and thus more vulnerable to use by the supplier outside of the arrangement, a non‐renegotiable closed‐price contract is more efficient. Additionally, limited disclosure policies and informal agreements based on repeated interactions complement indirect governance via price contracts. Copyright © 2015 John Wiley & Sons, Ltd.     

M&A advisory and the merger review process

Two firms propose a merger to the antitrust authority. They are uninformed about the efficiencies generated by the merger, but can hire an expert to gather information on their behalf. The authority is also uninformed about the merger’s efficiencies, but can run a costly internal investigation to learn them. We analyze the effect of the disclosure of the expert’s contract on consumer welfare, and show that consumers are not necessarily better off with disclosure. This possibility result hinges on a free-riding problem between expert and authority in the information acquisition game, and is more relevant in highly competitive industries.     

The role of short-term contracts and subsidies in licensing

An innovator without production facilities owns a patented invention that lasts two periods, and looks for the best licensing arrangement with a producer that has private information about the market value of the invention. The license is either a single long-term contract in force over both periods or a series of short-term contracts, one per period. Under short-term contracts, the licensee can strategically signal the value of the invention with its level of production in the first period and thus influence the terms of the contract in the second period. We show that the licensor prefers successive short-term contracts rather than a single long-term contract for intermediate-level probabilities of dealing with an efficient licensee, while the first-period contract may optimally include a per-unit subsidy (a negative royalty rate) in order to correct signaling distortions in the licensee’s production for this period. We also show that prohibiting such subsidies can lead to welfare losses.