bank acquisitions and ownership structure theory and evidence abstract in this paper we both theoretically and empirically consider the joint nature of two ownermanager conflict resolution mechanisms insider shareholdings and shareholder concentration we find evidence of a significant entrenchment effect for high low firms moreover bidder returns are found to be positive for high high firms only we utilize a switching of regression regimes model to solve for critical values of and that subdivide the universe of acquiring firms into separate and distinct ownership structure regimes i e that define high vs low levels of or

privatisation in developing countries a review of the evidence and the policy lessons privatisation is widely promoted as a means of improving economic performance in developing countries however the policy remains controversial and the relative roles of ownership and other structural changes such as competition and regulation in promoting economic performance remain uncertain this article reviews the main empirical evidence on the impact of privatisation on economic performance in developing economies the evidence suggests that if privatisation is to improve performance over the longer term it needs to be complemented by policies that promote competition and effective state regulation and that privatisation works best in developing countries when it is integrated into a broader process of structural reform

trade policy and mixed enterprises this paper demonstrates that the degree of state ownership affects neither the level of socially optimal activities nor welfare if the government chooses optimal trade policy instruments in the case of rivalry in the home market the optimal import tariff is independent of the degree of state ownership and the optimal production subsidy decreases with state ownership if the optimal tariff is positive for the case of cournot rivalry in a third market the optimal export subsidy increases with state ownership while in the case of bertrand rivalry with differentiated products the optimal export tax increases

career concerns incentives and endogenous learning in labour markets models of career concerns provide a framework for analyzing the actions that may be taken by a manager in an attempt to influence performance signals that the market uses to update its beliefs on her productivity and the incentive problem that arises if such actions do not coincide with those that maximize the financial return to a firm s owner this survey provides a formal introduction to the main types of models of career concerns hidden action and hidden information and discusses some extensions of these models applications of the career concerns framework to explain aspects of managerial behavior and the form of labor market institutions are emphasized copyright 1992 by blackwell publishers ltd

managerial bargaining power in the determination of compensation contracts and corporate investment this paper considers the design of managerial compensation contracts and their impact on corporate investment decisions and the managerial effort decision the model relates the compensation scheme to outside share ownership and managerial bargaining position using the methods of mechanism design under asymmetric information a shift in favor of effort is documented in the case where managerial bargaining strength is weak while a shift toward more use of capital investment results from strong managerial bargaining power the model distinguishes managerial equity holdings from contingent compensation contracts our results are related to the empirical literature on pay performance sensitivities

capital budgeting and delegation abstract as part of our ongoing research into capital budgeting processes as responses to decentralized information and incentive problems we focus in this paper on when a level of a managerial hierarchy will delegate the allocation of capital across projects and time to the level below it in our model delegation is a way to save on costly investigation of proposed projects therefore it is more extensive the larger are the costs of such investigations this delegation takes advantage of the fact that the lower level manager s preferences are assumed to be similar though not identical to those of the higher level

product market competition and managerial slack this article analyzes the effect of product market competition on managerial incentives in contrast to hart 1983a i show that competition may actually exacerbate the incentive problem the difference in results derives from our different assumptions about managerial preferences the importance of assumptions about preferences suggests that we do not yet understand the precise mechanism through which competition affects incentives

limited liability and incentive contracting with ex ante action choices abstract this article examines a principal agent model of financial contracting in which a risk neutral entrepreneur agent makes an unobservable ex ante effort choice while employing the investment funds of a risk neutral investor principal the key innovation is that the investment contract is subject to statutory liability limits given these liability limits two settings are considered one in which the investor payoff function is also constrained to be monotonically nondecreasing in firm profit and another in which no such monotonic contract constraint is imposed in the former case a standard debt contract is shown to emerge and a first best effort choice is not achieved in the latter setting the optimum is characterized by a live or die payoff function and a first best effort level may or may not be realized

empirical evidence on the relation between stock option compensation and risk taking abstract we examine whether executive stock options esos provide managers with incentives to invest in risky projects for a sample of oil and gas producers we examine whether the coefficient of variation of future cash flows from exploration activity our proxy for exploration risk increases with the sensitivity of the value of the ceo s options to stock return volatility eso risk incentives both eso risk incentives and exploration risk are treated as endogenous variables by adopting a simultaneous equations approach we find evidence that eso risk incentives has a positive relation with future exploration risk taking additional tests indicate that eso risk incentives exhibits a negative relation with oil price hedging in a system of equations where eso risk incentives and hedging are allowed to be endogenously determined overall our results are consistent with esos providing managers with incentives to mitigate risk related incentive problems

the effects of incentive compensation contracts on the risk and return performance of commodity trading advisors this paper shows that commodity trading advisors ctas investment performance may be partially explained by their incentive compensation contracts contracts include base incentive and asset parameters the relationships between contract parameters and performance are theoretically indeterminate but are examined here empirically results indicate that incentive parameters are positively related to return means and standard deviations the dollar amounts of assets ctas manage are negatively related to return means and standard deviations supporting elton et al s 1987 1989 finding that cta performance falls after public offerings of commodity funds intuitively since dollar fees are a function of assets at the higher asset and fee levels achieved through commodity fund offerings ctas may safeguard assets and fees by pursuing less risky investment strategies

optimal contracts under adverse selection and moral hazard a continuous time approach this article presents a continuous time agency model in the presence of adverse selection and moral hazard with a risk averse agent and a risk neutral principal under the model setup we show that the optimal controls are constant over time and thus the optimal menu consists of contracts that are linear in the final outcome we also show that when a moral hazard problem adds to an adverse selection problem the monotonicity condition well known in the pure adverse selection literature needs to be modified to ensure the incentive compatibility for information revelation the model is applied to a few managerial compensation problems involving managerial project selection and capital budgeting decisions we argue that in the third best world the relationship between the volatility of the outcome and the sensitivity of the contract depends on interactions between the managerial cost and the firm s production functions contrary to conventional wisdom sometimes the higher the volatility the higher the sensitivity of the contract the firm receiving good news sometimes chooses safer projects or invests less than it does with bad news we also examine the effects of the observability of the volatility on corporate investment decisions copyright 2005 oxford university press

contracting theory and accounting abstract this paper reviews agency theory and its application to accounting issues i discuss the formulation of models of incentive problems caused by moral hazard and adverse selection problems i review theoretical research on the role of performance measures in compensation contracts and i compare how information is aggregated for compensation purposes versus valuation purposes i also review the literature on communication including models where the revelation principle does not apply so that nontruthful reporting and earnings management can take place the paper also discusses capital allocation within firms including transfer pricing and cost allocation problems

what have we learned about policy and growth from cross country regressions economists have been seeking to comprehend why some countries are rich and others poor for well over 200 years a better understanding of the national policies associated with long run growth would both contribute to our ability to explain cross country differences in per capita incomes and provide a basis for making policy recommendations that could lead to improvements in human welfare recently economists have used cross country regressions to search for empirical linkages between longrun growth and indicators of national policies e g roger kormendi and philip meguire 1985 robert j barro 1991 the large cross country growth literature has identified various fiscal monetary trade exchange rate and financial policy indicators that are significantly correlated with longrun growth yet levine and david renelt 1992 show that many of these findings are fragile to small alterations in the conditioning information set that is small changes in the right hand side variables produce different conclusions regarding the relationship between individual policies and growth in this paper we take stock of what the profession has learned from cross country regression studies of policy and long run growth i limitations

accounting conservatism and managerial incentives there are two sources of agency costs under moral hazard 1 distortions in incentive contracts and 2 implementation of suboptimal decisions in the accounting literature the relation between conservative accounting and agency costs of type 1 has received considerable attention cf watts 2002 however little appears to be known about the effects of accounting conservatism on agency costs of type 2 or trade offs between agency costs of types 1 and 2 the purpose of this study is to examine this void in a principal agent setting in which the principal motivates the agent to expend effort using accounting earnings this study shows that accounting earnings become more useful for reducing agency costs of type 2 when measured conservatively than when measured aggressively combined with the result in kwon et al 2001 that agency costs of type 1 decrease with accounting conservatism this analysis suggests that conservative accounting enhances the incentive value of accounting signals with

state divestiture as a policy instrument in developing countries abstract reducing the size and role of the public sector in developing countries and emphasizing prices and markets as allocative mechanisms has led to increased privatization measures of which divestiture has been the most common variant the paper examines this experience and indicates that ownership transfer is neither a necessary nor sufficient condition for achieving more efficient use of resources in the design of divestiture the weighting given to enhancing freedom of entry and intensity of competition remains critical at the same time the paper notes the existence of multiple constraints including profitability and capital market limitations that continue to impede the implementation of divestiture measures the conditions for divestiture to be both appropriate and successful are shown to be restrictive

executive effort and selection of risky projects this article examines the incentives of executives to adopt risky projects the agency problem considered is that of motivating the executive to expend effort to generate information about the profitability of projects and to select the best project conditional upon the information that his effort generates we show that the executive and the principal will not always agree regarding which project is best we provide conditions under which this conflict of interest leads from the principal s perspective to either an underinvestment or an overinvestment in risky projects

on managerial contracting with asymmetric information abstract this paper deals with asymmetric information in a two period principal agent model where the agent makes investment decisions after observing a private signal we study the case where the current employer has more information than other prospect employers and the case where the private information is not verifiable by the current employer we analyze the effect of these asymmetries on the wage contracts as well as their interplay

misselling through agents this paper analyzes the implications of the inherent conflict between two tasks performed by direct marketing agents prospecting for customers and advis ing on the product s suitability for the specific needs of customers when structuring salesforce compensation firms trade off the expected losses from misselling unsuitable products with the agency costs of providing market ing incentives we characterize how the equilibrium amount of misselling and thus the scope of policy intervention depends on features of the agency problem including the internal organization of a firm s sales process the transparency of its commission structure and the steepness of its agents sales incentives jel m31 m37 m52 when purchasing unfamiliar products consumers often rely on information and advice pro vided by representatives of the seller this creates the possibility of misselling the question able practice of a salesperson selling a product that may not match a customer s specific needs 1 this problem is particularly severe in markets for technically complex products such as con sumer electronics auto repairs medical care and retail financial services including securities pensions insurance policies and mortgages an important feature of these markets is that the seller often deals with the customer through an agent rather than directly for example financial brokers typically recommend purchase of a specific product after inquiring about their customers particular circumstances and needs the possibility of abuse has led to regulation in some of these markets most notably for securities transactions the financial industry regulatory authority finra the major self regulatory organization for securities firms operating in the united states mandates that broker dealers make a reasonable effort to obtain information about the individual characteristics of their noninstitutional cus tomers and to ensure that their recommendations are suitable to customers financial situations

an agency theory of the division of managerial labor should responsibility for strategic planning and execution be assigned to the same manager should a firm have a chief operating officer with responsibilities distinct from those of the chief executive officer how does the division of labor affect managerial opportunism this paper uses a formal agency theoretic model to address these questions and present a new theory of the division of managerial labor building on penrose s typology penrose e 2009 the theory of the growth of the firm 4th ed blackwell oxford uk the theory identifies when to assign i entrepreneurial services which relate to strategic planning and the acquisition of resources and ii managerial services which relate to execution to the same generalist manager rather than to different specialists the analysis reveals the critical importance of separability i e whether a supervisor can separately observe the outcomes of entrepreneurial and managerial services if managers and their supervisor have symmetric information about separability hiring a generalist dominates because managerial services which are easier to assess reduce the scope for opportunism associated with entrepreneurial services which are harder to assess conversely if managers have better information regarding separability and the probability of separability is low hiring specialists dominates because hiring a generalist allows the potential for opportunism associated with entrepreneurial services to contaminate the provision of managerial services even so the benefits of hiring a generalist may be restored if the services are sequenced appropriately an implication of such sequencing is that a firm will grow in fits and starts giving rise to a penrose effect even if labor market frictions do not impede the assimilation of new managers

an analysis of the use of accounting and market measures of performance in executive compensation contracts prior research has provided useful insights into the structure of compensation plans and their incentive effects however one important limitation of these studies is the virtual absence of any cross sectional analyses of the attributes of compensation contracts 2 this absence is related in part to the problems associated with controlling for other factors that affect compensation that is compensation contracts are

leviathan resists the endogenous relationship between privatization and firm performance using a panel dataset of privatized cement firms in turkey this paper models and finds support for the simultaneous relationship between privatization and firm performance it is found that favorable short run performance weak market potential higher employment lower socio economic development concentrated voter preferences and weaker representation of right wing parties in the firms locality delay the timing of privatization the paper also finds that privatization increases output in the medium term by reducing the labor stock and promoting the adoption of more advanced technology such that production shifts from constant to decreasing returns to scale

the use of management control mechanisms to mitigate moral hazard in the decision to outsource using archival data from the u s passenger airline industry this study examines whether management control mechanisms aimed at mitigating moral hazard explain outsourcing decisions over and above transaction cost economics tce determinants documented in prior research consistent with tce theory we find that in house production efficiencies and our proxy for transaction risk i e deriving from transaction infrequency transaction complexity and relationship specific investments significantly explain the extent of outsourcing of aircraft maintenance we extend tce insights to show that incentive delta i e the sensitivity of ceo portfolio holdings to stock price changes strengthens the negative association between production efficiencies and outsourcing while incentive vega i e the sensitivity of ceo holdings to stock return volatility weakens the negative association between transaction risk and outsourcing monitoring strengthens the negative association between in house production efficiencies and outsourcing but has no effect on the transaction risk outsourcing relation the results suggest that the use of outsourcing to achieve cost savings is promoted through both incentive contracts and monitoring but outsourcing to achieve the desired risk level is promoted only through incentive contracts

privatization fdi inflow and economic growth evidence from china s provinces 1978 2008 china s economic growth over 1978 2008 is a miracle this article attempts to figure out and quantify the factors leading to this miracle it is generally believed that economic reform and opening up is the key to china s economic success but that is far from being exact and specific this study hypothesizes that privatization and foreign direct investment fdi inflow are the two key factors in this process we focus on identifying the exact specific and detailed mechanisms of privatization and fdi inflow in promoting economic growth especially from the provincial level then using a panel data covering 31 provinces of chinese mainland over 1978 2008 we find statistically significant evidence to support our hypotheses we predict that further economic growth depends on further privatization and opening up that is depends on denationalization of the economy

contract based motivation for keeping records of a manager s reporting and budgeting history this paper analyzes the role of the agent s bankruptcy constraints in multiperiod principal agent models with asymmetric information conditions are provided under which commitment to a long term contract involving n rounds of investment improves upon repetition of n identical single period contracts further when the agent s reservation wage is sufficiently low the optimal contract is always long term keeping records of a manager s history of reporting activity facilitates contracting since optimal contracts may require a link between past reports and future investments over a duration of two or more periods

incentives for information production and optimal job assignment with human capital considerations in this paper we examine the problem of inducing a manager to acquire information which is useful in determining his optimal job assignment but which might also adversely affect his market value we show that spot contracts are optimal and generate the first best effort level when the manager is risk neutral when the manager is risk averse the optimal contact consists either of a partial insurance contract against downward revisions in compensation or a competitive spot contract depending upon the nature of prior information

resource allocation decisions under imperfect evaluation and organizational dynamics research and development r d projects face significant organizational challenges especially when the different units who run these projects compete among each other for resources in such cases information sharing among the different units is critical but it cannot be taken for granted instead individual units need to be incentivized to not only exert effort in evaluating their projects but also to truthfully reveal their findings the former requires an emphasis on individual performance whereas the latter relies on the existence of a common goal across the organization motivated by this commonly observed tension we address the following question how should a firm balance individual and shared incentives so that vital information is both acquired and equally importantly disseminated to the entire organization our model captures two key characteristics of r d experimentation information is imperfect and it is also costly our analysis yields several important implications for the design of such incentive schemes and the management of r d portfolios this paper was accepted by david hsu entrepreneurship and innovation

productive efficiency of public enterprises a macroeconomic analysis based on cross section estimation of a neoclassical production function over the past decade the role of public enterprise in the economic development process has been a subject of active debate using cross section estimates of a neoclassical production function incorporating vakue addition of the parasatal sector as a variable supplementary to the factors and capital it is shown onthe basis of macroeconomic data for the periods 1970 81and 1970 85 that hypothesis derived fromm the propely rights bureaucracy and x inefficiency cannot be rejected

delegation of investment decisions and optimal remuneration of agents abstract we analyze an investor who delegates information acquisition and investment decisions to an agent the investor cannot monitor the agent s effort or information optimal pay schemes contain bonuses that increase with the net return rate of the investment but unlike conventional contracts at a decreasing rate moreover investments with low return rates are penalized again unlike conventional contracts nevertheless it may be optimal for the investor to reward the agent above the agent s reservation utility we examine the role of the agent s risk attitude for the shape of the pay scheme and whether firing after bad investments is a more effective threat than reduced pay we also analyze how the nature of the contract changes if the agent is given bargaining power

managerial career concerns and investments in information we extend the implicit incentives literature by analyzing how career concerns affect a riskneutral manager s decision about how much to learn about a project before investing in it the manager has unknown ability that determines the probability with which a good project is available so the market updates ability assessments from project outcomes while project choice is efficient in equilibrium an unobservable investment in the precision of project evaluation allows the manager to control the probabilities of future reputational states this distorts his investment in precision above first best when project payoffs can be observed only on accepted projects

directly unproductive profit seeking dup activities this paper propses directly unproductive profit seeking dup activities as a general concept that embraces a wide range of recently analyzed economic activities including the subset of rent seeking activities considered by krueger it then proceeds to provide a synthesis and generalization of the welfare theoretic analysis of such activities by developing a fourfold categorization of cases depending on the levels of distortions before and after the dup activity thus a unification and overview of the subject are achieved

reputational concerns and managerial incentives in investment decisions abstract i consider managerial incentives in investment decisions in the model a manager obtains private signals on projects the informative contents of which depend on his ability i show that in spot market equilibria the manager concerned about his market reputation disregards informative signals in early periods of his career considering long term contracts to remedy such inefficiency i find that for a risk neutral manager wage guarantees may implement an efficient investment rule while for a risk averse manager the optimal contract must trade off investment efficiency for intertemporal consumption smoothing and risk sharing

intertemporal capital budgeting abstract this paper analyzes the optimal capital budgeting mechanism when divisional managers are privately informed about the arrival of future investment projects consistent with field study evidence an optimal allocation mechanism can include a stipulation that a capital request for discretionary investment will be declined with positive probability in the period after a significant investment was made even though this is ex post suboptimal the model derives a number of empirical predictions regarding capital budgeting and the investment of financially constrained firms

information management in incentive problems we extend the standard procurement model to examine how an agent is optimally induced to acquire valuable planning information before he choose an unobservable level of cost reducing effort concer

moral hazard and contractibility in investment decisions abstract this paper uses a principal agent framework to study the incentive effects of contractibility and moral hazard at the first stage of a two stage investment decision we show that when the intermediate signal is publicly observable and contractible there is overinvestment relative to the first best in second stage production purely for incentive reasons however if the intermediate signal cannot be contracted on and in addition the agent and the principal are permitted to act opportunistically the optimal delegated investment decision is to underinvest we discuss the implications of our analysis for the literature on costly monitoring

organizational economics and institutions as missing elements in economic development analysis abstract the main objective of this paper is to apply x efficiency theory to the analysis of organizations and state enterprises with special reference to developing countries in particular the black box relating to the internal operation of organizations is opened up to understand better the decision mechanisms operating within firms and institutions intrafirm conventions are explored as they relate to the impact of external and internal pressures on the decision making process implications are drawn to improve the internal efficiency of institutions in developing countries

the organizational cost of protection abstract this paper offers another explanation for the proposition that protection induces slack it employs a model of a hierarchic firm in which the firm s owner cannot observe the cost type or the effort level of his manager a production subsidy by stimulating output may increase the marginal information rents that have to be paid to the manager for higher effort the resulting increase in the firm s marginal cost of effort leads to reduced managerial effort amplifying the intra firm effort distortion if effort is initially below the optimal level and yielding an organizational cost of protection additional to the standard deadweight cost

to innovate or not to innovate incentives and innovation in hierarchies hierarchical organizations often perform poorly in inducing the adoption of innovations the authors examine a principal offering contracts to agents who make unobservable effort and adoption of innovation choices yielding moral hazard who occupy jobs of differing unobserved productivities yielding adverse selection and who engage in a repeated relationship with the principal causing a ratchet effect to arise increasing the rate of adoption of an innovation in such an organization causes the incentive costs of adoption to increase at an increasing rate relatively low rates of adoption may then be a response to the prohibitive incentive costs of higher adoption rates copyright 1990 by american economic association

barriers within firms to energy efficient investments abstract many investments in energy efficiency fail to be made despite their apparent profitability internal hurdle rates are often set at levels higher than the cost of capital to the firm reasons for these practices include bounded rationality principal agent problems and moral hazard the policy implication is that government can simultaneously improve overall energy efficiency and increase private sector productivity by providing informational and organizational services that go beyond the traditional regulatory framework

privatization technical efficiency and welfare consequences the case of the cote d ivoire electricity company cie abstract in 1990 cote d ivoire privatized the management of its electric power company lease contracting in this paper we are interested in identifying the economic effect of this institutional change by estimating a stochastic production frontier we have found that productive efficiency improved after privatization thanks to organizational innovations total factor productivity gains have been closely associated with a cost reduction strategy the way these gains have been distributed in a monopoly context suggests that consumers have been the main beneficiaries through a significant decrease of the relative price of electricity

job protection versus contracts at will trading off entrenchment and shirking i take an efficient contracting approach to answer the question how much job protection to offer employees in particular those at the top of organizations given their privileged information or formal authority senior managers who are not given such protection are likely to take opportunistic actions that make them less dispensable the optimal employment contract trades off the resulting inefficiencies that arise from such self made job security with the reduced incentives and higher compensation costs under explicit employment protection one implication of the model is that more senior managers such as ceos should receive both higher rents and more protection e g through contracts that are explicitly not at will or that specify a longer duration

work hard not smart stock options in executive compensation abstract this paper examines the optimal equity compensation for executives when executives choose a level of effort to devote to gathering information and a criterion for acting on the information gathered the optimal exercise price involves a trade off a higher exercise price moves the executive s decision criterion away from first best but provides leverage that moves the executive s effort toward first best this trade off depends on a variety of factors including the potential influence of decisions on firm value we document empirical regularities consistent with the theory such as that options are relatively less prevalent in the equity compensation of more senior executives

limited liability contracts between principal and agent abstract the optimal strategy of the principal is examined in an environment where there are ex post limitations on the maximum penalty that can be imposed on a riskneutral agent contrary to the case in which such limitations are not imposed it is in the principal s interest to deliberately forego the opportunity to induce socially efficient behavior and to instead design a contract that induces the agent to realize an efficient outcome only in the most productive state of nature and perhaps in certain very unproductive states the properties of the contract are examined in detail

overconfidence compensation contracts and capital budgeting a risk averse manager s overconfidence makes him less conservative as a result it is cheaper for firms to motivate him to pursue valuable risky projects when compensation endogenously adjusts to reflect outside opportunities moderate levels of overconfidence lead firms to offer the manager flatter compensation contracts that make him better off overconfident managers are also more attractive to firms than their rational counterparts because overconfidence commits them to exert effort to learn about projects still too much overconfidence is detrimental to the manager since it leads him to accept highly convex compensation contracts that expose him to excessive risk

privatization in theory and practice privatization george yarrow this paper examines the theoretical and empirical case for private versus public ownership privatization usually leads managers to place greater emphasis on the pursuit of profits however whether this is beneficial to society depends on the trade off between possible market failures due to a lack of competition and deficiencies in government control of public firms the competitive and regulatory environment is more important than the question of ownership per se in competitive markets there is a presumption in favour of private ownership where there is a natural monopoly vigorous regulatory action is required the evidence suggests that privatization has led to improved performance by firms such as the national freight corporation and cable and wireless which operate in a relatively competitive environment the benefits are less clear in the case of firms like bp britoil and british aerospace however the most worrying case is that of british telecom and the projected privatization of british gas where little thought has been given to limiting the abuse of monopoly power rather the regulatory environment has been tailored to the needs of the existing management and to ensuring a successful share flotation privatization is also advanced as a weapon for reducing trade union power encouraging wider share ownership redistributing wealth and improving the public finances however there are other policy instruments better suited to achieving these objectives the existing privatization programme has not led to a marked widening of share ownership and has resulted in windfall gains to a small group of investors at the expense of taxpayers in general

on evaluation costs in strategic factor markets the implications for competition and organizational design this paper uses a formal model to study how evaluation costs affect competition for resources in strategic factor markets it finds that relative scarcity may not always benefit resource sellers rather when competition among resource investors passes a certain threshold intensity miscoordination among investors increases to the point that sellers expected profits decline this paper extends the model to consider how investors organize to overcome managerial agency in resource evaluation two organizational designs are considered a incentivization wherein a lower level manager is motivated by an incentive contract to evaluate resources for an investor and b supervision wherein evaluation is either handled directly or closely monitored by headquarters the model suggests that competition among investors will be associated with a greater use of supervision and that investors using supervision will tend to make lower offers this paper also finds that supervision will be more common when valuable resources are rare this paper was accepted by bruno cassiman business strategy

economic perspectives on privatization despite being one of the most fundamental issues in political economy the question of the appropriate boundary between public and private enterprise received relatively little attention in mainstream economic analysis until quite recently in the 1980s however programs of ownership reform were started in many developed and developing countries dramatic though some of these policies have been they are likely to be overshadowed in the 1990s by even greater privatization in the reforming socialist economies the opening sections of this paper are organized around three broad and interrelated questions how does ownership matter for the efficiency of enterprise performance what is the role for privatization in financing public debts and deficits what are the distributional and political implications of privatization finally we examine privatization in practice in three countries britain chile and poland

markets market failures and development a central question in development economics is how can we account for differences in the levels of income and the rates of growth between the developed and less developed economies in the 1950s and 1960s there was a standard answer to this question the poor are just like the rich except they are poorer they have less human and nonhuman capital there was an immediate prescription for this diagnosis increase the resources of ldcs either by transferring capital to them either direct aid or education or by encouraging them to save more today these answers seem less convincing that they did two decades ago if the problem were primarily a shortage of physical capital the return to capital should be much higher in ldcs than in developed countries and the natural avarice of capitalists would lead to a flow of capital from the more developed to the less developed economies see howard pack 1984 and my 1988 paper if the problem were primarily a shortage of human capital then the educated in ldcs should receive a higher absolute as well as relative income than the educated in more developed economies how then can we account for high levels of unemployment among the educated and the migration of the educated from ldcs to more developed economies moreover the predictions of the standard neoclassical growth model of a convergence of growth rates in per capita income with permanent differences in per capita consumption being explained by differences in savings rates and reproduction rates do not seem to have been borne out these observations suggest that the ldcs differ from the developed countries in at least some other important respects and this view is corroborated by those studies which have looked at the productivity of similar plants operating in developed and less developed economies see pack 1984 1987 the difference can be attributed perhaps tautologically to differences in economic organization to how individuals factors of production interact and to the institutions which mediate those interactions among the most important of these institutions are markets it is by now well recognized that there are many instances of market failures in more developed economies see bruce greenwald and myself 1986 in some cases market failures may be ameliorated by nonmarket institutions if for instance capital markets do not function well perfectly if only because of costly and imperfect information nonmarket institutions internal capital markets within large conglomerates may develop market failure is more prevalent in ldcs and the nonmarket institutions that ameliorate its consequences are at least in many instances less successful in doing so the objective of this paper is to explore the causes and consequences of these market failures and the failure of private nonmarket solutions and to suggest possible roles for government intervention tdiscussants anne 0 krueger duke university stanley fischer world bank

moral hazard in corporate investment and the disciplinary role of voluntary capital rationing this paper compares three capital budgeting rules the npv rule a high hurdle rate and capital rationing and explains why some firms may voluntarily impose capital rationing under both capital rationing and a high hurdle a restrictive investment criterion is used to control managerial shirking however implementation of these budgeting rules requires a mechanism to prevent the firm from expanding the investment scale ex post capital rationing in the form of a predetermined fixed budget differs from the high hurdle rate rule in that the former requires the firm to overcome the cost of raising additional capital before making further investment

using cost observation to regulate firms the paper emphasizes the use of accounting data in regulatory or procurement contracts when the supplier 1 has superior information about the cost of the project and 2 invests in cost reduction the main result states that under risk neutrality the supplier announces an expected cost and is given an incentive contract linear in cost overruns this optimal contract moves toward a fixed price contract as the announced cost decreases an investment choice is then introduced and the use of a rate of return regulation is studied

using the capital market as a monitor corporate spinoffs in an agency framework a model is developed in which corporate spinoffs are a feature of incentive contracts for product managers in diversified firms i argue that the possibility of a future spinoff can improve current incentives for divisional managers even if a spinoff rarely actually occurs spinoff incentive policies exploit the fact that after a spinoff the stock value of the product line is a much cleaner signal of managerial productivity than when the division belongs to the parent firm i show that providing current incentives through such a reorganization policy can dominate standard principal agent contracts in highly diversified firms empirical implications of the model are developed regarding corporate spinoff behavior and the compensation of divisional managers

asymmetric information incentives and intrafirm resource allocation this paper considers the question how should a firm allocate a resource among divisions when the productivity of the resource in each division is known only to the division manager obviously if the divisions as represented by their managers are indifferent among various allocations of the resource the headquarters can simply request the division managers to reveal their private information on productivity knowing that the managers have no incentive to lie the resource allocation problem can then be solved under complete or at least symmetric information this aspect is a flaw in much of the recent literature on this topic i e there is nothing in the models considered which makes divisions prefer one allocation over another thus although in some cases elaborate allocation schemes are proposed and analyzed they are really unnecessary in the model we develop a division can produce the same output with less managerial effort if it is allocated more resources and effort is costly to the manager we further assume that this effort is unobservable by the headquarters so that it cannot infer divisional productivity from data on divisional output and managerial effort given these assumptions we seek an optimal resource allocation process our results show that certain types of transfer pricing schemes are optimal in particular if there are no potentially binding capacity constraints on production of the resource then an optimal process is for each division to choose a transfer price from a schedule announced by the headquarters division managers receive a fixed compensation minus the cost of the resource allocated to them at the chosen transfer price resources are allocated on the basis of the chosen transfer prices if there is a potentially binding constraint on resource production a somewhat more complicated but similar scheme is required

optimal incentive contracts with multiple agents abstract a setting in which a single principal contracts with two agents who possess perfect private information about their own productivity is considered with correlated productivities each agent s private information also provides a signal about the other agent s productivity in contrast to the setting in which there is only one agent it is shown that such private information may be of no value to the agents it is only if the agents are risk averse that their private information may allow them to command rents moreover when the agents are constrained only to reveal their private information truthfully as a nash equilibrium the pareto optimal incentive scheme may induce the agents to adopt strategies other than truth telling this leads to the consideration of truth telling equilibria that are not pareto dominated in the subgame played by the agents among all such equilibria the one preferred by the principal restricts one agent to tell the truth as a dominant strategy and the other as a nash response to truth

the effect of risk on the ceo market this article presents a market equilibrium model of ceo assignment pay and incentives under risk aversion and moral hazard each of the three outcomes can be summarized by a single closed form equation in the presence of moral hazard assignment is distorted from positive assortative matching on firm size as firms with higher risk or disutility choose less talented ceos such firms also pay higher salaries in the cross section but economywide increases in risk or the disutility of being a ceo do not affect pay the strength of incentives depends only on the disutility of effort and is independent of risk and risk aversion if the ceo can affect firm risk incentives rise and are increasing in risk and risk aversion we calibrate the losses from various forms of poor corporate governance such as failures in monitoring and inefficiencies in ceo assignment jel g34 j33 this article presents a market equilibrium model of ceo assignment pay and incentives risk averse managers of different talents are hired in a competitive market by heterogeneous firms which vary in their size risk and level of effort required the level of pay drives the assignment of talent to firms the strength of incentives induces the efficient effort level and is determined by an optimal contracting approach our main contribution is to incorporate risk into a ceo market equilibrium in a tractable manner a large empirical literature has shown that risk is a firstorder determinant of compensation contracts demsetz and lehn 1985 garen 1994 core and guay 1999 oyer and schaefer 2004 peters 2009 peters and wagner 2009 but most theories assume risk neutrality this assumption is

project evaluation and control in decentralized firms is capital rationing always optimal when capital investments are made in an agency setting we show that even without risk considerations capital rationing need not be the only rational outcome we analyze a principal agent model with risk neutrality and with two productive inputs the agent s efforts and capital investment the two inputs can be either economic complements or substitutes the agent has pre contract private information about his own type the output is measured with an additive noise we show that when the two inputs are substitutes the optimal solution entails a marginal capital rationing but when the two inputs are complements then either a marginal capital rationing or a marginal leniency could be the optimal response our results therefore provide an explanation for why firms may employ a capital rationing for a project that may increase manufacturing complexity and hence may reduce managerial labor productivity yet employ a less strict criterion for evaluating a productivity enhancing project this result contrasts with earlier results where only a capital rationing is shown to be optimal

ownership structure institutional organization and measured x efficiency efficiency measurement has become a very popular field in applied economics in recent years and with this interest there has been a large intellectual investment in refining the empirical methods available to researchers in the area in this paper we relate these developments to harvey leibenstein s original 1966 insight into the psychological ideas underlying the notion that economic agents may not achieve maximal efficiency in their productive decisions and behavior of course it is always possible to argue that apparent inefficiency only arises from a failure of the observer to realize what it is that is being maximized however we shall evade this easy escape route into nonfalsifiable hypothesizing and instead shall take at face value the fact that too many empirical studies have come up with substantial measures of inefficiency for us to ignore its importance for normative economics

lower salaries and no options on the optimal structure of executive pay we estimate a standard principal agent model with constant relative risk aversion and lognormal stock prices for a sample of 598 us ceos the model is widely used in the compensation literature but it predicts that almost all of the ceos in our sample should hold no stock options instead ceos should have lower base salaries and receive additional shares in their companies for a typical value of relative risk aversion almost half of the ceos in our sample would be required to purchase additional stock in their companies from their private savings the model predicts contracts that would reduce average compensation costs by 20 while providing the same incentives and the same utility to ceos we investigate a number of extensions and modi cations of the standard model but nd none of them to be satisfactory we conclude that the standard principal agent model typically used in the literature cannot rationalize observed contracts one reason may be that executive pay contracts are suboptimal

why are bad products so hard to kill it is puzzling that firms often continue to invest in product development projects when they should know that demand will be low we argue that bad products are hard to kill because firms face an inherent conflict when designing managers incentives rewarding success encourages managers to forge ahead even when demand is low to avoid investing in low demand products the firm must also reward decisions to kill products however rewarding managers for killing products effectively undermines the rewards for success the inability to resolve this tension forces the firm to choose between paying an even larger bonus for success and accepting continued investment in low demand products we explore the boundaries of this argument by analyzing how the timing of demand information affects product investment decisions

linearity with project selection and controllable diffusion rate in continuous time principal agent problems i extend holmstrom and milgrom s model by allowing the agent to control privately or publicly the diffusion rate process and show that the optimal contract is still linear i discuss the conditions under which conflicts over the choice of diffusion rate do and do not arise as an application i examine project selection problems of a firm conflicts between the manager and investors arise because giving the manager too much incentive to work to increase the profit from ongoing operations can induce him to be too conservative in project selection possibly resulting in optimal contracts with low sensitivities

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

pessimistic information gathering an agent gathers information on productivity shocks and accordingly produces on behalf of a principal information gathering is imperfect and whether it succeeds or not depends on the agent s effort contracting frictions come from the fact that the agent is pessimistic on the issue of information gathering and there are both moral hazard in information gathering private information on productivity shocks and moral hazard on operating effort an optimal menu of linear contracts mixes high powered productivity dependent screening options following good news with a fixed low powered option otherwise

relative performance evaluation and project selection relative performance evaluation rpe occurs when one person s compensation depends on the relation of his output to that of others agency theory e g lazear and rosen 1981 and holmstrom 1979 1982 predicts that managerial compensation will use relative performance when other firms outputs reveal information about the manager s actions which is not knowable from the manager s output alone tests of the theory measure other firms outputs using the performance of other firms in the same industry or some macroeconomic measures of performance these two approaches are designed to separate industry and economy effects from the effects of the manager s actions empirical tests by antle and smith 1986 and janakiraman lambert and larcker 1992 found limited evidence that managerial compensation is adjusted for industry effects gibbons and murphy 1990 found some adjustment in ceo compensation for industry performance and much more adjustment for changes in market wide rates of return this paper provides an explanation for these empirical results by illustrating how the benefits of rpe based schemes depend on the absence of project choice decisions in the canonical agency model 1

an analysis of the principal agent problem most analyses of the principal agent problem assume that the principal chooses an incentive scheme to maximize expected utility subject to the agent s utility being at a stationary point an important paper of mirrlees has shown that this approach is generally invalid we present an alternative procedure if the agent s preferences over income lotteries are independent of action we show that the optimal way of implementing an action by the agent can be found by solving a convex programming problem we use this to characterize the optimal incentive scheme and to analyze the determinants of the seriousness of an incentive problem

privatization and economic growth an empirical investigation from a sample of developing market economies this paper explores the economic determinants of privatization programmes and the macroeconomic impact of this institutional reform on the growth rate of the gdp a sample of thirty five developing market economies is considered over the 1988 92 period probit and tobit models are used to identify the determinants of successful privatization programmes then regressions are run where probabilities probit and expected values tobit are successively included as additional regressors beside the potential influence of other economic policy variables a significant positive effect is highlighted giving evidence of the importance of divestiture the economic effect is found to be stronger when this institutional reform took place in industry or infrastructure

world product and income international comparisons of real gross product the volume reports on the third phase of the united nations international comparison project icp the main results provide comparisons of real gross domestic product gdp per capita for thirty four countries in 1975 quantity and price comparisons are given also for personal consumption capital formation and public consumption and further subdivisions of final expenditures on gdp are estimated

capital rationing and organizational slack in capital budgeting this paper reconciles three stylized facts about capital budgeting in firms and shows that they are tied to the presence of asymmetric information among the several members of the firm each with his or her own objectives and decisions the facts of interest are 1 the existence of organizational slack 2 the rationing of resources within organizations 3 the stated cut off rate for accepting capital projects in firms is often greater than the market rate of interest organizational slack is defined as the excess of resources allocated over the minimum necessary to accomplish the tasks assigned resource rationing is defined as the under allocation of resources i e an increase in the amount allocated would generate revenues in excess of its costs rationing and slack are both manifestations of ex post inefficiencies an lp model is used to show that these inefficiencies can occur in ex ante efficient organizational designs when asymmetric information is present the optimal allocation policy involves a hurdle rate criterion in which the hurdle rate is strictly in excess of the cost of capital thus inducing rationing in some states of the world typically resources are optimally allocated such that slack exists in other states the optimal allocation policy trades off these two inefficiencies