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on Contract Theory and Applications |
| By: | Chongwoo Choe; In-Uck Park |
| Abstract: | In a typical corporate hierarchy, the manager is delegated the authority to make strategic decisions, and to contract with other employees. By studying a model with one principal and two agents where one agent can gather information that is valuable for the principal's project choice and the other agent provides effort to the chosen project, we study when the principal can benefit from such delegation relative to centralization. We show that beneficial delegation is possible when complete contracts cannot be written, and delegation of authority should necessarily be to the information gatherer. The benefits of delegation stem from either efficiency gains or reduction in rent to the information gatherer. |
| Keywords: | Corporate hierarchies, information gathering, delegation, centralization |
| JEL: | C72 D21 D82 L22 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:mos:moswps:2010-03&r=cta |
| By: | Berliant, Marcus; Yu, Chia-Ming |
| Abstract: | Agglomeration can be caused by asymmetric information and a locational signaling effect: The location choice of workers signals their productivity to potential employers. The cost of a signal is the cost of housing at a location. When workers’ marginal utility of housing is negatively correlated with their productivity, skill-biased technological change causes a core-periphery bifurcation where the agglomeration of high-skill workers eventually constitutes a unique stable equilibrium. When workers’ marginal utility of housing and their productivity are positively correlated, skill-biased technological improvements will never result in a core-periphery equilibrium. Location can at best be an approximate rather than a precise sieve for high skill workers. |
| Keywords: | Agglomeration; Adverse Selection; Asymmetric Information; Locational Signaling |
| JEL: | R13 D82 D51 |
| Date: | 2009–12–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:24799&r=cta |
| By: | Dan Kovenock (University of Iowa); Florian Morath (Max Planck Institute of Intellectual Property, Competition and Tax Law); Johannes Münster (Free University of Berlin) |
| Abstract: | We study the incentives to share private information ahead of contests, such as markets with promotional competition, procurement contests, or R&D. We consider the cases where firms have (i) independent values and (ii) common values of winning the contest. In both cases, when decisions to share information are made independently, sharing information is strictly dominated. With independent values, an industry-wide agreement to share information can arise in equilbrium. Expected effort is lower with than without information sharing. With common values, an industry-wide agreement to share information never arises in equilibrium. Expected effort is higher with than without information sharing. |
| Keywords: | information sharing; contest; all-pay auction |
| JEL: | D82 D43 D44 L13 D74 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:334&r=cta |
| By: | A. Fedele; A. Mantovani |
| Abstract: | Does management consulting facilitate the access to credit for start-ups? This paper tries to answer the question by developing a theoretical framework where a firm applies for a bank loan to implement a risky project. The probability of success increases if the firm exerts a costly managerial extra-effort, but the bank is unable to observe such an effort: a moral hazard problem may therefore occur. During an economic downturn the project’s expected profitability is likely to be low relatively to the effort cost. In this case we find that credit is granted only if the bank hires a management consultant, even when the latter does not improve the business practice. |
| JEL: | M11 M13 D82 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:712&r=cta |
| By: | Hitoshi Matsushima (Faculty of Economics, University of Tokyo) |
| Abstract: | We investigate a game of delegated portfolio management such as hedge funds featuring risk-neutrality, hidden types, and hidden actions. We show that capital gain tax plays the decisive role in solving the incentive problem. We characterize the constrained optimal fee scheme and capital gain tax rate; the fee after taxation must be linear and affected by gains and losses in a low-powered and symmetric manner. We argue that high income tax incentivizes managers to select this scheme voluntarily. The equity stake suppresses the distortion caused by solvency. |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:cfi:fseres:cf205&r=cta |
| By: | Addison, John T. (University of South Carolina); Altemeyer-Bartscher, Martin (Chemnitz University of Technology); Kuhn, Thomas (Chemnitz University of Technology) |
| Abstract: | The poor performance often attributed to many public employment services may be explained in part by a delegation problem between the central office and local job centers. In markets characterized by frictions, job centers function as match-makers, linking job seekers with relevant vacancies. Because their search intensity in contacting employers and collecting data is not verifiable by the central authority, a typical moral hazard problem can arise. To overcome the delegation problem and provide high-powered incentives for high levels of search effort on the part of job centers, we propose output-related schemes that assign greater staff capacity to agencies achieving high strike rates. |
| Keywords: | matching unemployment, public employment service, delegation problem, moral hazard, search theory |
| JEL: | J64 D82 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp5170&r=cta |
| By: | Stephen Eliot Hansen |
| Abstract: | In most firms, managers periodically assess workers' performance. Evidence suggests that managers withhold information during these reviews, and some observers argue that this necessarily reduces surplus. This paper assesses the validity of this argument when workers have career concerns. Disclosure has two effects: it exposes the worker to uncertainty about future effort levels, but allows him to use current effort to influence his employer's beliefs about future effort. The surplus-maximizing disclosure policy reveals output realizations in the center of the distribution, but not in the tails. Thus, it is efficient for firms to reveal some but not all performance information. |
| Keywords: | Performance Appraisal, Career Concerns, Incentives, Risk. |
| JEL: | D82 D86 L20 M12 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1232&r=cta |
| By: | Rupayan Pal; Bibhas Saha |
| Abstract: | Whether the outcome of bargaining over wage and employment between an incumbent firm and a union remains efficient under entry threat is examined. The workers\' reservation wage is not known to the entrant, and entry is profitable only against the high reservation wage. The entrant observes the pre-entry price, but not necessarily the wage agreements. When wage is not observed, contracts feature over-employment. Under separating equilibrium the low type is over-employed, and under pooling equilibrium the high type is over-employed. But when wage is observed, pooling equilibrium may not always exist, and separating equilibrium does not involve any inefficiency. [Working Paper No. 2010-016]. |
| Keywords: | firm, employment, Efficient Bargaining, Entry Threat, Signalling, Inefficiency, wage, employed, equilibrium, inefficiencey, contracts, price, enttrant, reservation, |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ess:wpaper:id:2833&r=cta |
| By: | Songzi Du; Yair Livne |
| Abstract: | We study how information perturbations can destabilize two-sided matching markets. In our model, agents arrive on the market over two periods, while agents in the first period do not know the types of those arriving later. Agents already present in the market may match early or wait for the small group of new entrants. Despite the lack of discounting or risk aversion, this perturbation creates incentives to match early and leave the market before the new agents arrive. These incentives do not disappear as the market gets large. Moreover, we identify a new adverse phenomenon in this setting: as markets get large the probability of \emph{chaos} -- where no early matching scheme for existing agents is robust to pairwise deviations -- approaches 1. These results are independent of the distribution of agents' types and robust to asymmetries between the two sides of the market. Our findings thus suggest that matching markets are extremely sensitive to institutional details and uncertainty. |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1009.0769&r=cta |
| By: | Brown, Alessio J. G.; Merkl, Christian; Snower, Dennis J. |
| Abstract: | This paper examines the labour market matching process by distinguishing its two component stages: the contact stage, in which job searchers make contact with employers and the selection stage, in which they decide whether to match. We construct a theoretical model explaining two-sided selection through microeconomic incentives. Firms face adjustment costs in responding to heterogeneous variations in the characteristics of workers and jobs. Matches and separations are described through firms' job offer and firing decisions and workers' job acceptance and quit decisions. Our calibrated model for the U.S. can account for important empirical regularities that the conventional matching model cannot. |
| Keywords: | Matching; incentives; adjustment costs; unemployment; employment; quits; firing; job offers; job acceptance; |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ner:ifwkie:info:hdl:10419/37391&r=cta |