The value of transparency in multidivisional firms |
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| Institution: | 1. Università Cattolica del Sacro Cuore, Department of Economics and Finance, Milan, Italy; and CSEF, Naples, Italy;2. University of Mannheim, Department of Economics, and MaCCI, Mannheim, Germany;3. Università Cattolica del Sacro Cuore, Department of Economics and Finance, Milan, Italy;1. Departamento de Estatística e Investigación Operativa, Universidade de Vigo, Vigo, Spain;2. Departamento de Matemáticas, Universidade da Coruña, A Coruña, Spain;3. Centro de Investigación Operativa, Universidad Miguel Hernández de Elche, Elche, Spain;4. Departamento de Estatística e Investigación Operativa, Facultade de Ciencias Empresariais e Turismo, Universidade de Vigo, Ourense, Spain |
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| Abstract: | 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. |
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