Enhancing Vertical Efficiency Through Horizontal Licensing

This paper examines the role of patent licensing in the age of outsourcing. When firms rely on outsourced inputs, a patent holder’s decision to license has both competitive and supplier pricing effects. By issuing a license, the firm increases competition in the product market. At the same time, the need to make royalty payments “weakens” the firm’s rival, making it more sensitive to supplier pricing. The supplier responds by softening pricing terms, and the firm benefits by siphoning some of these gains via the license fee. Not only can the licensor gain, but all other parties (the licensee, supplier, and consumers) can also benefit. This role of licensing presents additional considerations for regulators shaping patent laws. We thank Michael Crew, John Fellingham, Sharon Oster, David Sappington, Doug Schroeder, and two anonymous referees for helpful comments. Anil Arya acknowledges support from the John J. Gerlach Chair.     

Using Job Rotation to Extract Employee Information

This article provides an incentive-based explanation for thepractice of job rotation. When agents privately learn aboutthe productivity of tasks on which they work, job rotation canbe an efficient means of eliciting their information. Each agentfreely communicates his information since the switch in tasksguarantees his report will not subsequently be used againsthim; the report is used primarily in evaluating the new agentwho moves into the task. Another benefit is that an agent rotatedinto a job holds less task-specific information and is thuseasier to motivate. Job rotation also comes with a cost—agentsmust be compensated for the disutility of working on new tasks.We study this trade-off and identify conditions under whichjob rotation and specialization are each optimal.     

The role of budgeting in eliminating tacit collusion

While accounting textbooks emphasize the roles of budgeting in controlling and coordinating agents' activities, the principal-agent literature has focused primarily on the control aspect. Recent papers have studied the coordination aspect of budgeting in settings in which the agents are technologically dependent (sequential or joint production is considered). In this article, we develop a role for budgeting in coordination, despite the agents being technologically independent (individual production is considered). In our model, the principal uses relative performance evaluation to extract information rents from the agents. However, the use of relative performance evaluation results in a multiple equilibria (tacit collusion) problem. The value of budgeting procedures is derived from their ability to coordinate the agents to arrive at the right equilibrium.     

Performance measurement manipulation: cherry-picking what to correct

A common feature of managerial and financial reporting is an iterative process wherein various parties selectively correct particular measurements by challenging them and subjecting them to increased scrutiny. We model this feature by adding an agent appeal stage to the standard moral hazard model and show that it can be optimal to allow the agent to decide which performance measures to appeal, despite the agent’s incentive to cherry-pick. In the presence of measurement errors, the agent is incentivized by increased opportunities for cherry-picking that arise if he chooses the “right” vs. the “wrong” acts.