the nature of diversified business groups a research design and two case studies diversified business groups dominate the private sectors of most of the world s economies several of these economies have undergone sudden policy changes that significantly increase domestic competitive intensity the authors demonstrate how the changes in corporate scope that accompany such competitive shocks can be used to weigh the importance of different explanations for the existence of diversified business groups the authors illustrate their reasoning by studying the restructuring of two of india s largest business groups following a comprehensive post 1991 package of policy reforms the case studies also elucidate aspects of the restructuring process that should inform larger sample empirical analyses copyright 1998 by blackwell publishing ltd

new technology adoption in us telecommunications the role of competitive pressures and firm level inducements in this study we examine the reasons for the differential adoption levels of a new technology that of electronic switching across firms in the us telecommunications industry using theoretical postulates from the market structure inducements approach to firm behavior and the behavioral theory of the firm we propose that the incentives to adopt a new technology are positively related to the competitive pressures faced by a firm in its micro market negatively related to past levels of performance and positively related to slack availability our sample consists of 40 of the largest firms in the industry we use firm level data collected for the years 1973 1978 1981 1984 and 1987 and the results indicate strong support for our proposition our findings show that in general market effects via the mechanism of competitive pressures generated are strong in explaining inter firm variations in levels of technology adoption in the period since moves to deregulate the industry began however the firm level effects are equally strong if not stronger in explaining such variations both in the period leading up to the commencement of deregulatory moves and also immediately thereafter

outcome based accountability theory and evidence abstract a firm s payoffs can often depend on whether it exceeds a threshold of performance in a principal agent setting we demonstrate that the optimal contract induces efficient effort by basing firing decisions solely on whether the agent was successful even though the absolute level of performance is more informative we test the predictions of our model using thirty seasons of nfl data we find that a coach is 6 percentage points more likely to be fired after a close loss beyond this the margin of victory has no significant impact on firing probabilities despite being more informative about future success also consistent with the predictions of our model coaches maximize team effort by playing their best players when doing so has the largest impact on the probability of winning

hierarchical organization and incentives abstract we study decentralization in public decision making as the possibility for local authorities to sign incentive contracts with local agents in a context of asymmetric information we first review some theoretical arguments put forward for the optimality of decentralized structures we then present a model of organization of incentive policy in the eu context where national authorities have better information on their agents but less bargaining power than central authorities at the community level we show the complementarities between both levels of regulation

internal capital markets and the competition for corporate resources this article examines the role of corporate headquarters in allocating scarce resources to competing projects in an internal capital market unlike a bank headquarters has control rights that enable it to engage in winner picking the practice of actively shifting funds from one project to another by doing a good job in the winner picking dimension headquarters can create value even when it cannot help at all to relax overall firm wide credit constraints the model implies that internal capital markets may sometimes function more efficiently when headquarters oversees a small and focused set of projects this article analyzes the process by which internal capital markets channel limited resources to different uses inside a company in so doing it seeks to address two related sets of questions first what is the fundamental economic rationale for creating an internal capital market that is under what circumstances can it make sense to combine several technologically distinct projects under one roof and have them seek funding from corporate headquarters as opposed to setting them up as stand alone companies that each raise external financing on their own second given this rationale what is the optimal size and scope of an internal capital market should headquarters be involved in funding a large number of projects or just a few and should these projects be unrelated to one another or in similar lines of business the answers to both sets of questions flow from the insight that in a credit constrained setting where not all positive npv projects can be financed headquarters can create value by actively reallocating scarce funds across projects for example the cash flow generated by one division s activities may be taken and spent on investment in another division where the returns are higher or alternatively one division s assets may be used as collateral to raise financing that is then diverted to the other division simply put individual projects must compete for the scarce funds and headquarters job is to pick the winners and losers in this competition

performance comparisons and dynamic incentives it is well known that comparative performance information cpi can enhance efficiency in static principal agent relationships by improving the trade off between insurance and incentives in the design of explicit contracts in dynamic settings however there may be implicit as well as explicit incentives for example managerial career concerns and the ratchet effect in regulation we show that the dynamic effects of cpi on implicit incentives can either reinforce or oppose the familiar static insurance effect and in either case can be more important for efficiency the overall welfare effects of cpi are thus ambiguous and can be characterized in terms of the underlying information structure

catching the agent on the wrong foot ex post choice of monitoring abstract in a principal agent model with multiple performance measures we show that the principal benefits by choosing ex post which variables will be monitored if it is too costly for one type of agent to mimic all performance measures expected from another type the principal can hope to catch the agent on the wrong foot if the agent tries to misrepresent his type for cases of small asymmetry of information the principal can implement the first best contract for more serious asymmetries of information the first best is not implementable then the low type may be required to overproduce which is in contrast to the traditional result of second best contracting we also obtain a ranking of monitoring instruments according to the frequency of their use

subjective performance and the value of blind evaluation we investigate the incentive and project screening effects of anonymity in a setting of subjective performance evaluation if the review process is blind then the applicant s payoff relevant type is hidden from the reviewer if the process is nonblind or informed then the reviewer observes the applicant s type directly in either case the evaluator receives a noisy signal on the quality of the agent s project and decides whether to accept or reject it we find that if the signal is not verifiable then informed evaluation results in an excessively steep equilibrium acceptance policy the standard applied to low ability applicants is too stringent and the standard applied to high ability applicants is too lenient blind review in which all applicants face the same standard often provides better incentives but it discards valuable information for screening projects we discover that blind review is more likely to be preferred by the evaluator when 1 the applicant pool is skewed toward high ability types 2 the stakes from acceptance are relatively high for applicants 3 both types of errors are relatively less costly or 4 there is little competition among reviewers we also discover that under blind review the evaluator may benefit from a more diverse applicant pool

sharing default information as a borrower discipline device abstract creditors often share information about their customers credit records besides helping them to spot bad risks this acts as a disciplinary device if creditors are known to inform one another of defaults borrowers must consider that default on one lender would disrupt their credit rating with all the other lenders this increases their incentive to perform however sharing more detailed information can reduce this disciplinary effect borrowers incentives to perform may be greater when lenders only disclose past defaults than when they share all their information in some instances by fine tuning the type and accuracy of the information shared lenders can raise borrowers incentives to their first best level

retaking in high stakes exams is less more placement both in university and in the civil service according to performance in competitive exams is the norm in much of the world repeat taking of such exams is common despite the private and social costs it imposes we develop and estimate a structural model of exam retaking using data from turkey s university placement exam limiting retaking results in all agents gaining ex ante and most gaining expost this result comes from a general equilibrium effect retakers crowd the market and impose negative spillovers on others by raising acceptance cutoffs

on transparency in organizations when is it best for the principal to commit to not disclosing all that he she knows in moral hazard interactions i show that whenever the agent would choose the same action under complete information at several distinct states then full transparency can generically be improved upon this implies that full transparency is generically suboptimal whenever the dimension of the information held by the principal exceeds the dimension of the agent s action in a simple class of problems i make further progress on the best disclosure policy assuming the principal can either disclose fully the state or remain silent

contracting with imperfect commitment and noisy communication abstract this paper provides new analytical tools for studying principal agent problems with adverse selection and limited commitment by allowing the principal to use general communication devices we overcome the literature s common but overly restrictive focus on one shot direct communication in addition general communication devices solve two fundamental problems of contracting with imperfect commitment first they allow us to identify the local downward incentive constraints as the relevant ones if the agent s preferences satisfy a single crossing property second we show how one may restrict the cardinality of the message spaces of the communication device an example illustrates our arguments and the suboptimality of one shot direct communication

the firm as a nexus of treaties part 1 knowledge its acquisition sharing and or asymmetry the participatory generation of information rents and the theory of the firm masahiko aoki common knowledge and the co ordination of economic activities jacques cremer profit sharing information and employment matti pohjola part 2 vertical integration and the strategic management of the enterprise what is vertical integration michael h riordan vertical integration transaction costs and learning by using kurt lundgren the firm as a nexus of internal and external contracts torger reve part 3 issues of labour organization the viability of worker ownership an economic perspective on the political structure of the firm henry hansmann intellectual skill and the role of employees as constituent members of large firms in contemporary japan kazuo koike the implicit contract for corporate law firm associates ex post opportunism and ex ante bonding robert h mooking part 4 finance and the political structure of the firm capital structure as a mechanism of control a comparison of financial systems erik berglof long term contracts in financial markets hakan lindgren the principle of external accountability in competitive markets herbert gintis union militancy and plant designs kar ove moene can transaction cost economics explain trade associations marc schneiberg and j rogers hollingsworth

hindsight biased evaluation of political decision makers hindsight bias is a cognitive deficiency that leads people to overestimate ex post how predictable an event was in this paper we develop a political agency model in which voters are hindsight biased and politicians differ in ability defined as information concerning the optimal policy when public information is not too accurate low ability politicians sometimes gamble on suboptimal policies in an attempt to mimic the high ability type who has superior private information they go against public information and choose a policy whose expected payoff to society is negative we model hindsight bias as a memory imperfection that prevents voters from accessing their ex ante information about the state of the world we show that the bias can act as a discipline device that reduces policy gambles and can therefore be welfare enhancing although it is well known that restrictions on information acquisition can be beneficial for a principal our contribution is to show that a psychological bias can have such an effect

non commitment in performance evaluation and the problem of information distortions abstract auditing is modeled in a sequential game without commitment the manager must decide whether and where to audit a worker s output taking into account all interim information he has obtained the worker will work just hard enough and show it to divert the manager from making an audit or cover up withholding information about his work to make an audit more difficult this usually raises the costs of setting work incentives so incentives are softened sometimes drastically moreover when a worker s on the job information is valuable for entrepreneurial decisions work incentives must be softened to improve the internal flow of information

managerial incentive problems a dynamic perspective the paper studies how a person s concern for a future career may influence his or her incentives to put in effort or make decisions on the job in the model the person s productive abilities are revealed over time through observations of performance there are no explicit output contingent contracts but since the wage in each period is based on expected output and expected output depends on assessed ability an implicit contract links today s performance to future wages an incentive problem arises from the person s ability and desire to influence the learning process and therefore the wage process by taking unobserved actions that affect today s performance the fundamental incongruity in preferences is between the individual s concern for human capital returns and the firm s concern for financial returns the two need be only weakly related it is shown that career motives can be beneficial as well as detrimental depending on how well the two kinds of capital returns are aligned it is well understood by now that informational externalities may place special demands on the organization of economic exchange simple price mediated markets will frequently fail in the presence of asymmetric information in that case more elaborate contractual arrangements have to be used as substitutes for the price system lately considerable effort has been devoted to the analysis of contracting under incomplete information with the objective to understand the range of economic institutions that emerge in response to the failure of the price system the analysis of moral hazard has played a prominent role in this development moral hazard problems arise when for some reason or another transacting parties cannot contract contingent on the delivery of the good for instance in buying labour services it may be that the amount of labour supplied is not directly observable precluding a simple exchange of wage for labour as a partial remedy to this problem an imperfect mutually observed signal about the supply of labour can be used as a proxy in the contract frequently output is taken as such a proxy the drawback is that output is often influenced by other factors than labour input which induce undesirable risk into the contract one is therefore faced with a tradeoff between allocating risk associated with incomplete observability and providing incentives for a proper supply of labour gaining insight into this tradeoff is important not only for understanding contracting in the small e g managerial incentive schemes but also because it is closely related to the fundamental tension between equity and efficiency in the society as a whole while our understanding of moral hazard has advanced a lot in past years it is clear that much work remains an important question that has received little attention until

transparency in agency the constant elasticity case and extensions this paper considers a hidden action agency problem where the principal has a single source of hidden information concerning the agent s utility the agent s effort productivity or the agent s cost of effort we examine whether the principal should precommit to disclosing these different single sources of information to the agent if the optimal contract is invariant over the hidden information and thus the disclosure rules constant elasticity case such disclosure increases the agent s utility it can raise or lower profit and total surplus depending on the source of hidden information and non disclosure can be optimal if disclosure affects the agent s motivation if the contract varies with the hidden information and thus disclosure rule disclosure or non disclosure can be optimal depending on whether the party s payoff is convex or concave in the information variable respectively

optimal incentive contracts in the presence of career concerns theory and evidence this paper studies optimal incentive contracts when workers have career concerns concerns about the effects of current performance on future compensation we show that the optimal compensation contract optimizes total incentives the combination of the implicit incentives from career concerns and the explicit incentives from the compensation contract thus the explicit incentives from the optimal compensation contract should be strongest for workers close to retirement because career concerns are weakest for these workers we find empirical support for this prediction in the relation between chief executive compensation and stock market performance

free entry and social inefficiency our goal is to provide a simple yet general exposition of the conditions under which the number of entrants in a free entry equilibrium is excessive insufficient or optimal our analysis compares the number of firms that enter a market when there is free entry with the number that would be desired by a social planner who is unable to control the behavior of firms once they are in the market that is we consider the second best problem of choosing the welfare maximizing number of firms while we take as given their noncompetitive behavior after entry we demonstrate that the crucial conditions for establishing the presence of an entry bias can be stated quite simply in terms of the outcome of the postentry game played by entrants in contrast to previous work we do not need to model this postentry game explicitly

arm s length relationships without moral hazard i show that cutting the flow of information between a principal and an agent can increase the power of the incentives of the agent to reveal private information jel d23 d82 d86 l20

are we better off if our politicians have more information the model of public policy studied in this paper has heterogeneous citizens voters and two public goods one roads chosen directly by an elected policy maker and the other pollution stochastically dependent on the amount of roads both a one country and a two country version of the model are analyzed the latter displays externalities across the countries which create incentives for free riding and strategic delegation the welfare effects of providing the policy maker with information about the relationship between roads and pollution are investigated and it is shown that more information hurts some sometimes even all citizens in particular the opportunity not to create an institution for information gathering can serve as a commitment device for a country although with the unfortunate effect of making the overall outcome even worse implications for the welfare effects of informational lobbying are also discussed

commitment through renegotiation proof contracts with third parties the paper analyzes contracts as means of strategic commitment that is commitment against outside parties to the agreement it considers the example of an incumbent firm which enters a contractual relationship with its workers in order to deter entry it assumes away the possibility for the parties to precommit not to make pareto improving renegotiations of the agreement once entry has taken place under symmetric information the contract is thus found to be useless for entry deterrence if the incumbent firm or workers possess some private information excessive post entry production levels can however be sustained ex post since output reductions may not be incentive compatible while information asymmetries are usually welfare decreasing when the goal is optimal risk sharing they can thus be welfare improving for the contracting parties when commitment against outsiders is the goal of the contract the role of the renegotiation process as a constraint on sustainable agreements is stressed in the paper and the general relevance of strategic contractual commitment is discussed

on vertical relations and the timing of technology adoption we study the timing of new technology adoption in markets with input outsourcing and thus with vertical relations we find that technology adoption can take place earlier when firms engage in input outsourcing than when they produce the input in house hence the presence of vertical relations can accelerate the adoption of a new technology we also find that particular features of a vertically related market such as the distribution of bargaining power and the contract type through which trading is conducted can crucially affect the speed of technology adoption

do new brooms sweep clean when and why dismissing a manager increases the subordinates performance abstract if a manager stays in office for a long time he will have learned much about his subordinates thus competition among them will be weak as the manager has made up his mind who is suited best for which position with a new manager the race for favorable tasks is restarted leading subordinates to exert higher effort but for the firm owner the trade off arises that with a new manager effort is larger but the quality of task allocation is worse since information is lost the optimal dismissal policy will be nonmonotonic in the expected heterogeneity of the subordinates abilities

strategic ignorance and the robustness of social preferences participants in dictator games frequently avoid learning whether their choice to maximize their own earnings will help or hurt the recipient and then choose selfishly exploiting the moral wiggle room provided by their ignorance however this is found in an environment in which the dictator must actively learn the true payoffs so inaction means ignorance does this effect persist when one must actively choose either to be ignorant or to be informed or when one must actively choose to remain ignorant in fact whereas 45 of dictators remain ignorant when one must click to become informed this drops to 25 when one must click in either case and to 3 when one must click to remain ignorant although the exploitation of moral wiggle room is not merely an artifact it is much like social behavior itself subject to environmental and psychological factors that may reinforce or undermine its impact data as supplemental material are available at http dx doi org 10 1287 mnsc 2014 1989 this paper was accepted by uri gneezy behavioral economics

benefits of a slanted view a discussion of disclosure bias abstract fischer and verrecchia j account econom 2004 forthcoming studies a model of imperfect competition in which firms disclosures are affected by biased information processing they find that optimism can add punch to a firm s actions when facing an optimist a rival is forced to soften its competitive posture thereby rendering such biases viable although the setting provides a cogent explanation for disclosure bias its reliance on imperfect information processing introduces some questions one concern is the ease with which polar results can be obtained when the rules of the game are sufficiently relaxed the discussion provides examples illustrating this and related issues

a theory of affirmative action in college admissions i introduction race conscious preferential admissions have been widely practiced by selective colleges and universities to enhance minority representation in higher education for example the college of arts and sciences at the university of michigan automatically added 20 points out of a possible 150 points to a minority applicant s score in its rating system harvard university has an unofficial lift scheme which also targets minority applicants however controversy has surrounded affirmative action ever since its inception for instance california texas and florida have already terminated the use of race conscious admissions at state funded institutions this debate culminated in the recent supreme court ruling regarding admissions procedures at the university of michigan which endorsed admissions rules that took into account race as a qualifying characteristic unfortunately positive studies on this issue have been scarce relative to the high profile of the debate according to holzer and neumark 1999 theoretical studies of the efficiency of affirmative action on education are virtually nonexistent some have argued that affirmative action is merely a patronage program and necessarily results in mediocracy rather than meritocracy in the debate on affirmative action practices in college admissions a major criticism is that affirmative action designed to create diversity comes at the cost of academic quality a competing view offered by those opposed to affirmative action is that it weakens school applicants incentives to achieve academic excellence for instance justice thomas wrote in his opinion in grutter v bollinger that there is no incentive for the black applicant to continue to prepare for the lsat once he is reasonably assured of achieving the requisite score supporters of this practice tend to emphasize the importance of diversity and the positive influence of diversity on the pedagogical environment steele 1990 these views however do not fully recognize the incentive structure behind affirmative action admissions rules it is unclear how a college admissions rule affects high school students incentives to achieve academic excellence which adds to their human capital stock and future productivity the process of college admissions by and large resembles a contest in which contestants exert costly effort in order to win a limited number of prizes in the context of college admissions to compete for a limited number of seats in the incoming class college candidates have to present their academic credentials such as gpa and sat score to the admissions officer to win the seat high school students have to invest in their human capital which improves the academic performance whereas the academic investments are costly and nonrefundable regardless of the outcome for example the tuition the money spent on books the salary paid to tutors the time and energy and so on all of these features may be approximated by an all pay auction mechanism we propose a simple theoretical framework that models the process of college admissions as an all pay auction to investigate two major questions is there any theoretical rationale for an affirmative action admissions rule how do such rules affect college candidates incentives to invest in academic effort two candidates one a minority and the other a nonminority simultaneously choose their academic efforts human capital investments to compete for a seat in a college we show that an academic quality oriented college prefers to adopt an admissions rule that scales up the test score of the minority relative to the nonminority although this rule is designed purely to maximize the expected academic quality of the incoming class it turns out to favor the minority and create ethnic diversity we show that the unique equilibrium affirmative action admissions rule creates a positive cross group interaction between college candidates incentives to make educational effort

nonpoint source pollution taxes and excessive tax burden if a regulator is unable to measure firms individual emissions an ambient tax can be used to achieve the socially desired level of pollution with this tax each firm pays a unit tax on aggregate emissions in order for the tax to be effective firms must recognize that their decisions affect aggregate emissions when firms behave strategically with respect to the tax setting regulator under plausible circumstances their tax burden is lower under an ambient tax relative to the tax which charges firms on the basis of individual emissions firms may prefer the case where the regulator is unable to observe individual firm emissions even if this asymmetric information causes the regulator to tax each firm on the basis of aggregate emissions

are ceos really paid like bureaucrats a common view is that there is little correlation between firm performance and ceo pay using a new fifteen year panel data set of ceos in the largest publicly traded u s companies we document a strong relationship between firm performance and ceo compensation this relationship is generated almost entirely by changes in the value of ceo holdings of stock and stock options in addition we show that both the level of ceo compensation and the sensitivity of compensation to firm performance have risen dramatically since 1980 largely because of increases in stock option grants

reallocation of corporate resources and managerial incentives in internal capital markets abstract diversified firms often trade at a discount with respect to their focused counterparts the literature has tried to explain the apparent misallocation of resources with lobbying activities or power struggles we show that diversification can destroy value even when resources are efficiently allocated ex post when managers derive utility from the funds under their purview moving funds across divisions may diminish their incentives the ex ante reduction in managerial incentives can more than offset the increase in firm value due to the ex post efficient reallocation of funds this effect is robust to the introduction of monetary incentives moreover we show that asymmetries in size and growth prospects increase the diversification discount

non parametric panel data models with interactive fixed effects this article studies non parametric panel data models with multidimensional unobserved individual effects when the number of time periods is fixed i focus on models where the unobservables have a factor structure and enter an unknown structural function non additively the setup allows the individual effects to impact outcomes differently in different time periods and it allows for heterogeneous marginal effects i provide sufficient conditions for point identification of all parameters of the model furthermore i present a non parametric sieve maximum likelihood estimator as well as flexible semiparametric and parametric estimators monte carlo experiments demonstrate that the estimators perform well in finite samples finally in an empirical application i use these estimators to investigate the relationship between teaching practice and student achievement the results differ considerably from those obtained with commonly used panel data methods

credit and efficiency in centralized and decentralized economies we study a credit model where because of adverse selection unprofitable projects may nevertheless be financed indeed they may continue to be financed even when shown to be low quality if sunk costs have already been incurred we show that credit decentralization offers a way for creditors to commit not to refinance such projects thereby discouraging entrepreneurs from undertaking them initially thus decentralization provides financial discipline nevertheless we argue that it puts too high a premium on short term returns the model seems pertinent to two issues soft budget constraint problems in centralized economies and differences between anglo saxon and german japanese financing practices

on the equivalence of general and specific control in organizations most principal agent relationships in firms are multidimensional in the presence of multiple tasks and multiple performance signals the contract between principal and agent not only has to motivate the agent but also has to direct the agent to allocate effort among different tasks the value of efforts for a specific task accrues not only through the principal s expected returns but also through its contribution to overall risk and therefore to the risk diversification of the task portfolio hence if the agent is risk averse multitask relationships can be considered as a portfolio problem coupled with incentive constraints we examine the relationship between specific control sc and general control gc for multitask principal agent problems under sc the principal observes the outcome of each individual task and uses this set of information for compensation under gc contracts are based only on the aggregate signal such as cumulative profits of all tasks we describe two sets of multitask problems for which gc and sc are equivalent that is contracts based only on aggregate performance signals impose the same incentives for the agent as a contract that is based on the outcome of each task the first multitask problem is characterized by homogeneous tasks in the second multitask problem all activities are perfect substitutes in the cost function of the agent the equivalence of sc and gc arises since gc provides insurance to the agent and yields the same overall risk premium as specific control moreover gc allows the principal to set the same incentives as sc since the marginal returns from gc are equal to the sum of the marginal returns for each task under sc the results described in this paper can serve as benchmarks where gc and sc are equivalent we show how the equivalence can be relevant for a variety of business situations such as the compensation of sales persons or managers at all hierarchy levels we also discuss the reasons when gc and sc differ suppose for instance that tasks are technologically separable and the precision of the performance of one task is low then the principal is forced under gc to adopt an incentive scheme that implements only a low effort across all tasks since the average precision matters under sc however the principal can tailor the optimal efforts to each task

managerial incentives and internal capital markets capital budgeting in multidivisional firms depends on the external assessment of the whole firm as well as on headquarters assessment of the divisions while corporate headquarters may create value by directly monitoring divisions the external assessment of the firm is a public good for division managers who consequently are tempted to free ride as the number of divisions increases the free rider problem is aggravated and internal capital markets substitute for external capital markets in the provision of managerial incentives the analysis relates the value of diversification to characteristics of the firm the industry and the capital market

purchasing sleeping patents to curtail budget padding abstract this paper provides an explanation for sleeping patents based not on their ability to deter external competitors but rather on their ability to discipline actions of the firm s employees by acquiring a patent upfront a firm is able to issue a credible threat that it will switch technologies if a manager s cost budget for the existing technology is too high this threat reduces the manager s propensity to pad budgets

managerial legacies entrenchment and strategic inertia this paper argues that the legacy potential of a firm s strategy is an important deter minant of ceo compensation turnover and strategy change a legacy makes ceo replacement expensive because firm performance can only partially be attributed to a newly employed manager boards may therefore optimally allow an incumbent to be entrenched moreover when a firm changes strategy it is optimal to change the ceo because the incumbent has a vested interest in seeing the new strategy fail even though ceos have no specific skills in our model legacy issues can explain the empirical association between ceo and strategy change this paper proposes a model of ceo replacement and puts forward a novel determinant for turnover decisions the legacy potential of a firm s strategy we mean by this the extent to which a manager s decisions affect future firm cash flows potentially beyond the manager s own tenure the replacement of a ceo is arguably one of the most important decisions a firm takes yet the theoretical and empirical finance literature has relatively little to say about the firm and manager specific characteristics that lead to one manager being fired and replaced by another as brickley 2003 points out the only variable that predicts turnover empirically is poor firm performance but it has little pre dictive power theoretical papers on managerial turnover tend to reduce ceo successions to a sequence of static interactions see below for more details as such they do not distinguish between a ceo who is hired and can start a fresh project or one who is constrained in this choice because he inherits a prede cessor s long term strategy our paper focuses on this latter phenomenon and investigates turnover decisions when strategy choices have a legacy potential the fact that a dynamic link exists between a ceo and his predecessor is probably more recognized in the accounting literature than in finance pourciau both authors are from the toulouse school of economics and the institut d administration des

the benefits of aggregate performance metrics in the presence of career concerns this paper considers the desirability of aggregate performance measures in light of the fact that many individuals performance incentives are driven by a desire to shape external perceptions and thus future pay in contrast to the case of explicit incentive contracts we find that when individuals actions are driven by career incentives an aggregate measure e g group or team output can sometimes alleviate moral hazard concerns and improve efficiency aggregation intermingles performance measures that may be differentially affected by skill and effort of many agents when such entanglement increases the prospect that the external market will attribute an employee s effort driven contribution to transferable skills the employee exerts higher effort as a means of posturing to the market the incentive benefit of aggregation is weighed against the incentive cost because of information loss information loss from aggregation can reduce the market s reliance on the measure and thus diminish agents desire to undertake effort to influence the measure this paper was accepted by stefan reichelstein accounting

competing lending platforms endogenous reputation and fragility in microcredit markets this paper shows that market fragility and mass default can arise in microcredit markets as a result of the strategic interaction between a microlender using a reputation based mechanism and a traditional lender using physical collateral in our model borrowers solve a dynamic programming problem which induces an endogenous equilibrium distribution of reputational capital because the quality of each lender s pool of borrowers is affected by both lenders interest rates lender reaction curves are non monotonic and discontinuous this can result in knife edge equilibria and mass default on the microlender precipitated by minor parametric perturbations fragility is exacerbated by borrower screening and sovereign risk but ameliorated when microlenders have social welfare goals our results highlight the importance of studying the entire credit market rather than microfinance in isolation

accounting policies in agencies with moral hazard and renegotiation we emphasize the role of accounting policies and their audit in an earnings management setting we use a two period agency in which three frictions interact the agent privately observes action or effort supply and output and the initial contract is subject to renegotiation this creates a setting in which both players behavior is of concern and importantly information rationing is efficient moreover this information rationing is directly interpretable as being produced by an accounting policy whose application is ensured by an auditor

internal versus external capital markets this paper presents a framework for analyzing the costs and benefits of internal versus external capital allocation we focus pritnarily on comparing an internal capital market with bank lending while both represent centralized forms of financing in the former case the financing is owner provided while in the latter ceise it is not we argue that the ownership aspect of internal capital allocation has three important consequences 1 it leads to more monitoring than bank lending 2 it reduces managers entrepreneurial incentives and 3 it makes it easier to efficiently redeploy the assets of projects that are performing poorly under existing management

uncertainty as commitment time inconsistency of no bailout policies can create incentives for banks to take excessive risks and generate endogenous crises when the government cannot commit however at the outbreak of nancial problems usually the government is uncertain about their nature and hence it may delay intervention to learn more about them we show that intervention delay leads to strategic restraint banks endogenously restrict the riskiness of their portfolio relative to their peers in order to avoid being the worst performers and bearing the cost of such delay these novel forces help to avoid endogenous crises even when the government cannot commit we analyze the eect of government policies from the perspective of this new result

strategic ignorance as a self disciplining device we analyse the decision of an agent with time inconsistent preferences to consume a good that exerts an externality on future welfare the extent of the externality is initially unknown but may be learned via a costless sampling procedure we show that when the agent cannot commit to future consumption and learning decisions incomplete learning may occur on a markov perfect equilibrium path of the resulting intra personal game in such a case each agent s incarnation stops learning for some values of the posterior distribution of beliefs and acts under self restricted information this conduct is interpreted as strategic ignorance all equilibria featuring this property strictly pareto dominate the complete learning equilibrium for any posterior distribution of beliefs

the capital budgeting process incentives and information we study the capital allocation process within firms observed budgeting processes are explained as a response to decentralized information and incentive problems it is shown that these imperfections can result in underinvestment when capital productivity is high and overinvestment when it is low we also investigate how the budgeting process may be expected to vary with firm or division characteristics such as investment opportunities and the technology for information transfer there is general agreement that investment decisions are the most important decisions made by corporations the choice of projects and the level of investment is critical not just for stakeholders of the firm but also for the economic well being of society as a whole it has been alleged that u s firms invest too little and tend to overemphasize short term results for example porter 1992 citing poterba and summers 1992 asserts that u s firms use hurdle rates to evaluate investment projects that are higher than their estimated costs of capital to understand the investment behavior of firms one must consider both the process by which external capital is made available to firms and the process by which internally and externally raised capital is allocated to investment projects within the firm considerable attention has been paid to how firms raise external capital the fundamental insight in this area is the celebrated result of modigliani and miller mm that capital structure is irrelevant in the absence of capital market frictions accordingly in the three decades since their contribution research on how external capital is raised has focused on market frictions including information and incentive problems relatively little research has focused on the internal allocation process and its relationship to the organization of the firm modern finance theory prescribes allocating capital according to the net present value npv rule just as the mm result itself provides no theory of the arrangements under which

the wrong kind of transparency in a model of career concerns for experts when is a principal hurt from observing more information about her agent this paper introduces a distinction between information on the consequence of the agent s action and information directly on the agent s action when the latter kind of information is available the agent faces an incentive to disregard useful private signals and act according to how an able agent is expected to act a priori this conformist behavior hurts the principal in two ways the decision made by the agent is less likely to be the right one discipline and ex post it is more difficult to evaluate the agent s ability sorting the paper identifies a necessary and sufficient condition on the agent signal structure under which the principal bene ts from committing not to observe the agent s action the paper also shows the existence of strategic complementarities between information on action and information on consequence the results on the distinction between action and consequence are then used to interpret existing disclosure policies in delegated portfolio management in particular they are consistent with hitherto puzzling evidence that mutual funds systematically overperform pension funds

arm s length relationships we show that lowering the cost of acquisition of information that a principal obtains about the performance of an agent may make it more difficult for the principal to commit to threats hence it will weaken incentives and can therefore be counterproductive this phenomenon is explored in a framework where improving the quality of information makes a commitment not to renegotiate less credible applications to the theory of the firm are briefly explored

regulating a monopolist with unknown costs we consider the problem of how to regulate a monopolistic firm whose costs are unknown to the regulator the regulator s objective is to maximize a linear social welfare function of the consumers surplus and the firm s profit in the optimal regulatory policy prices and subsidies are designed as functions of the firm s cost report so that expected social welfare is maximized subject to the constraints that the firm has nonnegative profit and has no incentive to misrepresent its costs we explicitly derive the optimal policy and analyze its properties in their classic papers dupuit 2 and hotelling 5 considered pricing policies for a bridge that had a fixed cost of construction and zero marginal cost they demonstrated that the pricing policy that maximizes consumer well being is to set price equal to marginal cost and to provide a subsidy to the supplier equal to the fixed cost so that a firm would be willing to provide the bridge this first best solution is based on a number of informational assumptions first the demand function is assumed to be known to both the regulator and to the firm while the assumption of complete information may be too strong the assumption that information about demand is as available to the regulator as it is to the firm does not seem unnatural a second informational assumption is that the regulator has complete information about the cost of the firm or at least has the same information about cost as does the firm this assumption is unlikely to be met in reality since the firm would be expected to have better information about costs than would the regulator as weitzman has stated an essential feature of the regulatory environment i am trying to describe is uncertainty about the exact specification of each firm s cost function in most cases even the managers and engineers most closely associated with production will be unable to precisely specify beforehand the cheapest way to generate various hypothetical output levels because they are yet removed from the production process the regulators are likely to be vaguer still about a firm s cost function 12 p 684 as this observation suggests it is natural to expect that a firm would have better information regarding its costs than would a regulator the purpose of this paper is to develop an optimal regulatory policy for the case in which the regulator does not know the costs of the firm one strategy that a regulator could use in the absence of full information about costs is to give the firm the title to the total social surplus and to delegate the pricing decision to the firm in pursuing its own interests which would then be to maximize the total social surplus the firm would adopt the same marginal cost pricing strategy that the regulator would have imposed if the regulator had

towards an economic theory of incentives in just in time manufacturing abstract just in time manufacturing is widely acknowledged as decreasing the costs of production but also as increasing the quality this is surprising we would expect that adding a constraint on the supplier that production be conducted at very specific times would induce a decrease in quality this paper argues that this paradox can be solved by noticing that the incentives of the buyer are changed by jit manufacturing he will be more willing to impose penalties on the supplier