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Abstract:
Many organizations attempt to manage agency problems not with incentive contracts but by keeping the principal involved in the decision process, that is, by limiting delegation. This paper develops a model to investigate the economics of several decision processes that are commonly used to set budgets in both the public and private sector. The key tradeoff is that partial delegation allows the principal to reject those projects he dislikes, but causes the agent to distort the information he transmits to the principal.

Abstract:
Many organizations attempt to manage agency problems not with incentive contracts but by keeping the principal involved in the decision process, that is, by limiting delegation. This paper develops a model to investigate the economics of several decision processes that are commonly used to set budgets in both the public and private sector. The key tradeoff is that partial delegation allows the principal to reject those projects he dislikes, but causes the agent to distort the information he transmits to the principal.

Abstract:
Standard models of team production imply that, due to the free rider problem, profit sharing tends to have negligible incentive effects in large organizations. Many observers therefore find the use of profit sharing in large firms puzzling. In this paper we show that if a firm can be decomposed into two separate teams whose outputs can be observed, then a tournament between these two teams sometimes solves the free rider problem. Moreover, we show that the relationship between production risk and the strength of incentives in an optimal tournament contract can be positive, contrary to the standard conclusion that optimal contracts should exhibit a trade-off between risk and uncertainty. We use our efficiency results to endogenize the firm's organizational structure. In particular, we show that in the presence of economies of scale, small firms tend to be organized as unitary firms, while large firms will tend to choose the multidivisional organizational form.

Profit Centers, Team Tournaments

Abstract:
We analyze whether ease and speed of entry can mitigate the anti-competititve effects of a merger, in a dynamic model of endogenous merger. In our model, if new firms can enter quickly, it is more likely that merger is motivated by efficiency as opposed to increased market power. Thus, there is less reason to challenge the merger. On the other hand, if entry of new firms becomes less costly, firms may have a stronger incentive to monopolize the industry through horizontal merger. We also show that when the incumbent can engage in entry deterrence activities, anti-merger policy can decrease welfare.

Horizontal Mergers, Entry Deterrence

Abstract:
We analyze whether ease and speed of entry can mitigate the anti-competititve effects of a merger, in a dynamic model of endogenous merger. In our model, if new firms can enter quickly, it is more likely that merger is motivated by efficiency as opposed to increased market power. Thus, there is less reason to challenge the merger. On the other hand, if entry of new firms becomes less costly, firms may have a stronger incentive to monopolize the industry through horizontal merger. We also show that when the incumbent can engage in entry deterrence activities, anti-merger policy can decrease welfare.

Horizontal Mergers, Entry Deterrence

Abstract:
This paper presents a theory of the allocation of authority in an organization in which centralization is limited by the agent's ability to disobey the principal. We show that workers are given more authority when they are costly to replace or do not mind looking for another job, even if they have no better information than the principal. The allocation of authority thus depends on external market conditions as well as the information and agency problems emphasized in the literature. Evidence from a national survey of organizations shows that worker autonomy is related to separation costs as the theory predicts.

authority, delegation, incentives

Abstract:
We offer a novel view of employee discounts and in kind compensation. In our theory, bundling perks and cash compensation allows a firm to extract information rents from employees who have private information about their preferences for the perk and about their outside opportunities. We show that in maximizing profit with heterogeneous workers, the firm creates different bundles of the perk and salary in response to different employee characteristics and marginal costs of the perk. Our key result is that strategic bundling can lead firms to provide perks even in the absence of any cost advantage over the outside market and to deviate from the standard marginal cost pricing rule. We characterize how this deviation depends upon the set of feasible contracts, upon the perk's marginal cost, and upon the correlation between the agents' preferences for the good and their reservation utilities.

Employee Discounts, In Kind Compensation, Bundling, Optimal Employment Contracts

Abstract:
This paper formulates a simple agency problem in a single division firm and has that firm merge with another firm having the same agency problem. The merger creates synergy, but it also causes the principal to lose information in observing the agent's performance. We call the latter problem the observability problem associated with merger. We focus on the interaction of these two by-products of merger and study their effects on the firm's agency contract and profit. A key point is that many of the beneficial effects that we would associate with the presence of synergy can be undone by the observability problem, so that the synergistic benefits of merger can be misgauged, if the observability problem is ignored. Two empirically testable implications arise. First, if the post merger contract is less sensitive, then the observability problem is essentially nonexistent and the merger is profitable. Second, if the post merger contract is very sensitive, then synergy is swamping the observability problem and the merger is profitable.

mergers

Abstract:
We analyze whether ease and speed of entry can mitigate the anti-competititve effects of a merger, in a dynamic model of endogenous merger. In our model, if new firms can enter quickly, it is more likely that merger is motivated by efficiency as opposed to increased market power. Thus, there is less reason to challenge the merger. On the other hand, if entry of new firms becomes less costly, firms may have a stronger incentive to monopolize the industry through horizontal merger. We also show that when the incumbent can engage in entry deterrence activities, anti-merger policy can decrease welfare.

Abstract:
In organizations, principals use decision rules to govern a more informed agent's behavior. We compare two such rules: delegation and veto. Recent work suggests that delegation dominates veto unless the divergence in preferences between the principal and the agent is so large that informative communication can not take place. We show that this result does not hold in a reasonable model of veto versus delegation. In this model, veto dominates delegation for any feasible divergence in preferences, if it induces the agent to shut down low quality proposals that he would otherwise implement and if such projects have sufficient likelihood.

veto, delegation

Abstract:
In many organizations, a principal uses simple decision rules or decision processes, as opposed to complete contingent monetary contracts, to regulate a more informed agent's behavior. This paper models two such rules: delegation and an approval process. We determine the principal's preferable rule under different conditions and characterize the optimal demand for talent. In addition, we describe the agent's expected welfare under these rules and characterize how different talent might sort into the rules. If the decision process is not a choice or if the principal chooses approval for private gain, the demand for talent can be tied to the magnitude of loss in the worst state, rather than the degree of discretion given to the manager. However, if the principal has discretion over the decision process and proper incentives, then more talent is demanded under delegation.

Firm Objectives, Organization, and Behavior

Abstract:
In the major areas of regulation, standards can be violated through an appeal process set up as a part of the statutes. This paper formulates a model of the variance appeal process, characterizes the (perfect Bayesian) equilibria of this procedure and studies the welfare properties of these equilibria. I consider two versions of the decision rule used by the appeal board and suggest institutionally feasible alterations in these rules which can improve equilibrium welfare. I also study how obstructionist interest groups can affect the welfare performance of the decision rules.

Regulation, interest groups, Industrial Policy