Incentives, Information, and Organizational Form

Al. 187 WP 331

35 Pages Posted: 19 Feb 1998

See all articles by Yingyi Qian

Yingyi Qian

Tsinghua University - School of Economics & Management; Centre for Economic Policy Research (CEPR)

Eric Maskin

Princeton University - Department of Economics; Harvard University - Department of Economics; Massachusetts Institute of Technology (MIT) - Department of Economics

Chenggang Xu

University of Hong Kong

Date Written: 1997

Abstract

We model an organization as a hierarchy of managers erected on top of a technology (here consisting of a collection of plants). In our framework, the role of a manager is to take steps to reduce the adverse consequences of shocks that affect the plants beneath him. We argue that different organizational forms give rise to different information about managers'performance and therefore differ according to how effective incentives canbe in encouraging a good performance. In particular, we show that, undercertain assumptions, the M-form (multi-divisional form) is likely to provide better incentives than the U-form (unitary form) because it promotes yardstick competition (i.e. relative performance evaluation) more effectively. We conclude by presenting evidence that the assumptions on which this comparison rests are satisfied for Chinese data.

JEL Classification: D2, D8, H1, L2, P5

Suggested Citation

Qian, Yingyi and Maskin, Eric S. and Xu, Chenggang, Incentives, Information, and Organizational Form (1997). Al. 187 WP 331. Available at SSRN: https://ssrn.com/abstract=60829 or http://dx.doi.org/10.2139/ssrn.60829

Yingyi Qian (Contact Author)

Tsinghua University - School of Economics & Management

Beijing, 100084
China

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Eric S. Maskin

Princeton University - Department of Economics ( email )

Institute for Advanced Study
Einstein Drive West Building Room 318
Princeton, NJ 08540
United States
(609) 734-8309 (Phone)
(609) 951-4457 (Fax)

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
(617) 495-4167 (Phone)
(617) 495-7730 (Fax)

Massachusetts Institute of Technology (MIT) - Department of Economics

50 Memorial Drive
E52-391
Cambridge, MA 02142
United States

Chenggang Xu

University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

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