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on Contract Theory and Applications |
| By: | Peter Achim (University of York); Willy Lefez (HU Berlin) |
| Abstract: | We study a static bilateral trade setting with moral hazard, where a seller privately chooses quality and a buyer may pay to verify it. We show that buyer-side information acquisition can lead to informational hold-up through a mechanism wecall surplus squeezing: precise verification enables the seller to extract all buyer surplus, deterring inspection and causing trade to unravel. When verification is noisy, uncertainty preserves buyer surplus and sustains trade. Our framework highlights how strategic responses to learning can distort investment incentives, offering a new perspective on the limits of information precision in mitigating moral hazard. |
| Keywords: | surplus squeeze; informational hold-up; buyer learning; costly information; |
| JEL: | D82 D83 |
| Date: | 2025–07–22 |
| URL: | https://d.repec.org/n?u=RePEc:rco:dpaper:538 |
| By: | Joaquín Coleff (CEFIP/CEDLAS); Juan Sebastián Ivars (Sciences Po) |
| Abstract: | We consider an organization with two projects which have productive spillovers. Three individuals are active in this organization: two agents, each specialized in one project, and the CEO, who is a generalist. The owner of the organization allocates authority over each project to these three individuals. This allocation determines the organizational design and aims to maximize profits subject to incentive constraints. The main constraints arise from non-contractible choices: in decision-making, to exploit the gains from spillovers, and in providing incentives to address moral hazard in effort. We show that the optimal organizational design can take one of the following forms: centralization, decentralization, hierarchical delegation, or cross-authority. Two forces drive the optimal organizational design: (i) the CEO’s productivity relative to the agents’ in exerting effort, and (ii) the value of spillovers relative to profits in the project over which an individual has authority. We illustrate the practical relevance of our model by analyzing the emergence of hierarchical delegation in Facebook’s major 2018 reorganization. |
| Keywords: | decision rights, authority, moral hazard, hierarchies, incentives |
| JEL: | C70 D23 L22 |
| Date: | 2025–08 |
| URL: | https://d.repec.org/n?u=RePEc:aoz:wpaper:367 |