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on Contract Theory and Applications |
| By: | Gianmarco León; Christopher Hansman; Jonas Hjort; Matthieu Teachout |
| Abstract: | This paper studies the relationship between a firm’s organizational structure and output quality. The setting is a large manufacturing sector in Peru where plants produce a vertically differentiated but otherwise homogeneous product for export: fishmeal. We link customs data to plant level data on each shipment’s quality grade, transaction level data on supplies, and GPS measures of supplier (fishing boat) behavior.We start by documenting a robust association between the quality grade of a firm’s exports and the share of its inputs that comes from vertically integrated suppliers at the time of production. To understand the source of this relationship, we first show that classical theories of the firm predict that, in incomplete contracts settings, owning productive assets upstream may help a subset of downstream manufacturers attempting to produce high quality output to incentivize quality-effort from the assets’ operators. This explanation finds empirical support: in a given supplier-plant pair, the supplier delivers higher quality inputs (fresher fish) when integrated, and does so comparatively more during periods when (i) the plant aims to produce high quality output, and/or (ii) exogenous variation in upstream production (plankton) conditions makes quality-effort more costly. Finally, we show that firms source more of their inputs from integrated suppliers when faced with firm-specific shocks to demand for high quality exports. These results document an overlooked motivation for vertical integration and that strategic changes in organizational structure help manufacturers in developing countries achieve export success. |
| Keywords: | Vertical integration, quality upgrading, export, Peru |
| JEL: | D2 O1 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1562&r=cta |
| By: | Franck Bien (LEDa - Laboratoire d'Economie de Dauphine - Université Paris-Dauphine); Thomas Lanzi (Department of Strategy, Entrepreneurship and Economics - SKEMA Business School) |
| Abstract: | We study optimal contracting in a communication setting in which an uninformed principal has the opportunity to undertake an outside option if an informed agent refuses the contract. The contract specifies a decision rule and a transfer for each unit of information revealed by the agent. Due to the existence of the outside option, the informational rent isnonmonotonic, and we characterize the properties of the optimal contract. We show that the outside option becomes a credible threat for the agent because it allows the principal to punish him severely with negative transfers. Moreover, we compare our optimal contract to the one under perfect commitment without an outside option developed by Krishna and Morgan [2008]. We find that regardless of the divergence of preferences between the principal andthe agent, the contract with an outside option is always better for the principal. Moreover, we show that the threat of using an outside option increases information extraction. |
| Keywords: | Transfers,Outside option,Communication,Mechanism Design |
| Date: | 2017–03–17 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01491912&r=cta |
| By: | Shinya Horie (Graduate School of Economics, Kobe University) |
| Abstract: | This paper considers a situation in which a corrupt government official does not commit to using the common corruption scheme called right of first refusal in a procurement auction. Under the right of first refusal, the contractors (or bidders) participate in a sequential auction, and there is no inefficiency in project allocation. However, in cases in which the scheme is not practiced, both contractors participate in a simultaneous auction, and the disadvantaged contractor bids more aggressively than the advantaged contractor. I found that such uncertainty regarding the practice of corruption schemes can lead to inefficiency, even when the corruption scheme itself is not practiced. |
| Keywords: | Procurement Auctions; Corruption, Right of first refusal |
| JEL: | C72 D44 L14 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:koe:wpaper:1710&r=cta |
| By: | Zhang, Jingwen (Tilburg University, School of Economics and Management) |
| Abstract: | Management control systems are commonly used by firms, but it is challenging to design an optimal control system because of the complexity of organizational contexts, and varieties of individuals with different preferences, beliefs and work relations within firms. In this dissertation, I examine how firms can adjust control decisions, such as target setting and monitoring intensity, to agents with different traits. I also study the outcome of implementing different controls, to describe how firms can benefit from this adaptation. In Chapter 2 we investigate how a principal can reduce the costs caused by explicit incentive contracts. We expect that the relation between principal and agents developed through repeated interactions can influence the target update process and help to mitigate the target ratchet effect. Using the data from a dealership, we empirically show that principals ratchet targets less for committed dealers in order to mute perverse effects of target ratcheting, and this motivates committed dealers to exert effort. Chapter 3 discusses the rationale of using same nonfinancial targets for each business unit (uniform targets) and investigates how to support the achievability of these targets, as uniform targets are not adjusted according to individual ability. We argue that firms may exploit the cause-and-effect relations between different performance measures to increase the achievability of nonfinancial targets (wage budget-employee satisfaction-customer satisfaction-revenue chain). We find that firms grant more wage budgets to managers who deliver substandard nonfinancial performance but outperform their peers, to facilitate their nonfinancial performance. Chapter 4 explores whether supervisors are able to know their agents and adapt monitoring intensity according to the tenure and confidence level of different agents. We predict and find that supervisors impose less monitoring to well-performed junior agents so that juniors can experiment and develop knowledge. We also find that monitoring increases for overconfident managers to control their risk-taking behavior. These results suggest that supervisors can indeed modify their level of direct supervision according to agent’s personal makeup and characteristics. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiutis:647192e2-8d0d-4265-8bc1-d1725311af82&r=cta |