Resource Allocation Auctions within Firms

There is growing interest in the use of markets within firms. Proponents have noted that markets are a simple and efficient mechanism for allocating resources in economies in which information is dispersed. In contrast to the use of markets in the broader economy, the efficiency of an internal market is determined in large part by the endogenous contractual incentives provided to the participating, privately informed agents. In this paper, we study the optimal design of managerial incentives when resources are allocated by an internal auction market, as well as the efficiency of the resulting resource allocations. We show that the internal auction market can achieve first‐best resource allocations and decisions, but only at an excessive cost in compensation payments. We then identify conditions under which the internal auction market and associated optimal incentive contracts achieve the benchmark second‐best outcome as determined using a direct revelation mechanism. The advantage of the auction is that it is easier to implement than the direct revelation mechanism. When the internal auction mechanism is unable to achieve second‐best, we characterize the factors that determine the magnitude of the shortfall. Overall, our results speak to the robust performance of relatively simple market mechanisms and associated incentive systems in resolving resource allocation problems within firms.     

Alfred Marshall's Mecca: Reconciling the Theories of Value and Development*

The purpose of this paper is to explore the evolutionary nature and content of Marshall's theory of value and the relation it bears to his theory of growth and development. In Marshall's work the two theories are inextricably linked, and the subsequent attempt to separate them has not only marginalised Marshall's rich analysis but also made it impossible to appreciate the role he gave to innovation, and its corollary the growth of knowledge and organisation, in the workings of a market economy. At its core is the relation between the growth of firms and the growth of markets, but this is not steady‐state growth theory; rather, it is the different, mutually determined and ever changing growth rates of different groups of firms that is at the centre of attention. Quite how variation is linked to progress is the central topic of this essay, and the elucidation of its central role necessarily means that we must resurrect the representative firm. We conclude that Marshall was correct in stating that ‘the tendency to variation is a chief source of progress’ (Principles, V, 4, p. 355). We develop a set of evolutionary tools to show how and why this is so. But evolution is more than variation; it requires the organisation of firms and the market process to generate that correlation between differential knowledge and economic advance. Most importantly of all, the concept of a representative firm is re‐established as an indispensable element in a Marshallian evolutionary analysis.     

Initial Public Offerings: An Analysis of Theory and Practice

We survey 336 chief financial officers (CFOs) to compare practice to theory in the areas of initial public offering (IPO) motivation, timing, underwriter selection, underpricing, signaling, and the decision to remain private. We find the primary motivation for going public is to facilitate acquisitions. CFOs base IPO timing on overall market conditions, are well informed regarding expected underpricing, and feel underpricing compensates investors for taking risk. The most important positive signal is past historical earnings, followed by underwriter certification. CFOs have divergent opinions about the IPO process depending on firm‐specific characteristics. Finally, we find the main reason for remaining private is to preserve decision‐making control and ownership.     

Where Do Clients Go when an Accounting Firm Goes Bankrupt?: The Case of Laventhol & Horwath

A chronicle is provided of some of the significant events in the life and death of the seventh-largest accounting firm in the United States, Laventhol & Horwath (L&H). In examining the success of individual firms in acquiring L&H's large audit clients, we ascertain whether Big Six firms were the beneficiaries of L&H's demise. A by-product of this examination is that public accounting firms should be wary of growth, per se . Specifically, more attention to their client selection standards is needed.     

Effects of Skill and Attitudes on Employee Performance and Earnings

This study uses original survey and archival data from factory and office employees in one firm to relate differences among individual employees' performance to differences in their skill and attitudes about work, and to test the association between employees' earnings and their performance, skill, and attitudes. We suggest that the way in which skill and attitudes affect performance will depend on the type of work that is done. The main results show that among factory employees, those who have on-the-job training and longer experience receive better performance ratings than those without training and with less experience. Factory employees' earnings depend on their performance, following the human capital model of wage determination. Among office workers, training and experience do not significantly affect performance ratings; instead, higher-rated employees have more positive attitudes about work. Office employees' earnings depend on their classroom training, experience, and attitudes, but not on their rated performance.