intertemporal cost dependence in the presence of managerial impatience abstract a multi period agency problem arising in the presence of intertemporal cost dependence is investigated the principal delegates production decisions to a manager who is impatient the manager has private information on the nature of cost dependence that takes the form of an experience effect since the impatient manager would not invest enough to gain experience the principal designs a second best scheme to motivate the manager to increase intertemporal profit for the firm the second best scheme is obtained as a direct revelation mechanism that specifies outputs prices as well as the manager s compensation a significant result is that unlike the first best case impatience is not necessarily a disadvantage with asymmetric information impatience can be exploited to reduce the manager s information rent resulting in preferred outcomes for the principal

information and incentives in computing services supply the effect of limited system choices abstract every organization has only limited computing resources that need to be shared by members of the organization rationing mechanisms such as pricing usually are used to regulate the demands for such resources however to derive an effective mechanism for determining the usage or the scale of an organization s computing service is difficult since there are many informational and incentive problems that need to be overcome by incorporating these problems into a game theoretic model this study analyzes the effects of limited system choices on an organization s net value generated from computing service based on the mechanism design approach the optimal incentive compatible mechanism is derived and contrasted with the case where the is department is evaluated as a profit center the results show that limited system choices can have significant effects on the value generated by an organization s computing service also depending on whether the is department is governed by the optimal mechanism or is evaluated as a profit center the effects oflimited system choices can be different managerial implications derived from the study are provided

the litigious plaintiff hypothesis case selection and resolution the process through which cases are selected for litigation cannot be ignored because it yields a set of lawsuits and plaintiffs that is far from a random selection either of potential claims or of potential claimants we present a theoretical framework for understanding the operation of this suit selection process and its relationship to the underlying distribution of potential claims and claimants the model has implications for the trial rate and the plaintiff win rate at trial our empirical analysis using data on over 200 000 federal civil litigations yields results that are strongly consistent with the theory

collective bargaining in the public sector the effect of legal structure on dispute costs and wages this paper examines the impact of collective bargaining legislation on dispute costs and wages using a panel of canadian public sector contracts the authors results suggest that policymakers designing collective bargaining legislation face a trade off between reducing dispute costs and increasing wages dispute costs are lower under compulsory arbitration than under the right to strike or when no collective bargaining legislation exists hence a switch to compulsory arbitration could potentially make both the union and the employer better off by reducing dispute costs however the authors find that wages are higher under compulsory arbitration than under other legal structures copyright 1991 by american economic association

cost allocation revisited an optimality result the resource manager of a firm is faced with capacity and pricing decisions with regard to a congestion prone system such as computer communication facilities difficulties arise since the manager is uninformed of the system demand when the capacity decision is to be made a game theoretic model is developed to analyze the effects of different accounting rules on the elicitation of relevant information and ex post efficiency in acquisition and allocation decisions the key result is that the cost allocation method aided by an anonymous reporting scheme is indeed as asserted by zimmerman zimmerman j 1979 the costs and benefits of cost allocations accounting rev 54 july 504 521 a full information efficient rule achieving optimality both in acquisition and allocation decisions discussions of the main assumptions underlying this result are provided

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

empirical test of a separating equilibrium in national football league contract negotiations i empirically test for a separating equilibrium in the bargaining contract of national football league nfl contract negotiations the separating equilibrium predicts that a player who delays contractual agreement signs a more lucrative contract and has positive private information on his ability level at the time of contract negotiations these predictions are tested using data on 1 873 players selected in the 1986 through 1991 nfl drafts the empirical results support the implications of the separating equilibrium

a revelation scheme for allocating organizational resources abstract efficient resource allocation in a hierarchical organization frequently requires top management to obtain information from division managers but division managers may place personal interests above those of the organization and communicate distorted information designing simple and robust optimal game theoretic revelation schemes is difficult instead of making another attempt at this we analyze a project valuation scheme actually used by several us government agencies under certain environments the scheme encourages managers to truthfully reveal the relative benefits of alternative projects while some aspects of these environments do not have nice mathematical properties we argue that they may well represent better characterizations of the way managers actually view their situation

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

on governing multilateral transactions with bilateral contracts bilateral contracts while neither negotiated nor enforced in an integrated way are nevertheless often interrelated both economically and strategically owing to production or consumption complementarities and to asymmetric information a set of bilateral contracts forms a mechanism with special properties this mechanism forms a contract equilibrium if there is no joint incentive for a supplier and any individual customer unilaterally to alter the terms of their contract if agents preferences are risk neutral in money income and if their private information is independent then there exists a contract equilibrium that implements efficient transactions if in addition preferences are strictly concave and differentiable in goods and services and technologically feasible sets are suitably convex then this equilibrium is essentially unique

centralized pricing versus delegating pricing to the salesforce under information asymmetry the issue of delegating pricing responsibility to the salesforce is of interest to marketing academics and practitioners it has been shown by lal 1986 that under certain situations with information asymmetry it is more profitable for the firm to delegate pricing authority to the salesforce than to have centralized pricing in this paper we re examine situations where information asymmetry exists and analyze its effect on the decision of the firm to set a price or delegate pricing responsibility to the salesforce using contract theory we find that when the salesperson s private information can be revealed to the firm through contracting centralized pricing performs at least as well as price delegation we derive the optimal centralized pricing contract under a set of standard assumptions used in the economics and business literature

strikes wages and private information private information models of strikes suggest that the strike is used as an information revealing device by the union in the presence of asymmetrical information a testable prediction of these models is that there is a negative relationship between strikes and the unpredicted component of the wage this paper finds evidence of such a relationship in a large sample of u s labor contracts the real wage falls by about 3 percent after a strike lasting one hundred days copyright 1989 by american economic association

optimal dynamic capital budgeting i study optimal design of a dynamic capital allocation process in an organization in which the division manager with empire building preferences privately observes the arrival and properties of investment projects and headquarters can audit projects at a cost under certain conditions a budgeting mechanism with threshold separation of financing is optimal headquarters 1 allocate a spending account to the manager and replenish it over time 2 set a threshold such that projects below it are financed from the account while projects above are financed fully by headquarters upon an audit further analysis studies when co financing of projects is optimal and how the size of the account depends on past performance of projects

why the npv criterion does not maximize npv this article presents a theory of capital allocation that shows how the use of net present value npv as an investment criterion leads to inefficient capital budgeting outcomes and how this criterion may be dominated by other capital budgeting criteria like the internal rate of return and the profitability index the essence of our theory is rooted in the mainstream paradigm of corporate finance while firms use npv to measure the addition to firm value from prospective projects classical informational and agency considerations prevent it from implementing the optimal capital budgeting outcome our theory also identifies conditions when alternative criteria should be used finally we characterize when direct monitoring through capital budgeting dominates compensation contracts in alleviating the agency problem copyright 2004 oxford university press

the value of transparency in multidivisional firms we study internal incentives transparency and firm performance in multidivisional organizations two independent divisions of the same firm design internal incentives and decide whether to publicly disclose their performances in each division a risk neutral principal deals with a risk averse exclusive agent under moral hazard each agent exerts an unverifiable effort that creates a spillover on the effort cost of the other agent we first study the determinants of the optimal principal agent contract with and without performance transparency then we show how effort spillovers affect the equilibrium communication behavior of each division both principals commit to disclose the performance of their agents in equilibrium when efforts are complements while no communication is the only equilibrium outcome when efforts are substitutes

logit estimates of strike incidence from canadian contract data logit estimates of strike incidence are made based on a unique and comprehensive data set of 2 437 collective agreements the appropriate level of aggregation since that is where bargaining occurs the results are interpreted through a theoretical framework emphasizing that strikes are more likely when the joint costs of using the strike mechanism are low relative to the cost of alternative mechanisms for achieving the same purposes such functions of strikes are to generate information elicit truth telling establish reputations provide catharsis and solve intraorganizational conflict

bargaining and the role of expert agents an empirical study of final offer arbitration abstract expert agents such as lawyers play a prominent role in conflict resolution yet little is known about how they affect outcomes we construct a model that permits us to estimate the influence of agents and test whether the parties in a dispute face prisoner s dilemma incentives using eighteen years of final offer arbitration data from new jersey we find the parties do significantly better when they retain agents and that the parties learn about this benefit over time however we also find that the gain to using an agent is fully offset when the opposing party also hires an agent since agents are costly this noncooperative equilibrium is pareto inferior

the causes of bargaining failure evidence from major league baseball abstract final offer arbitration in major league baseball provides an ideal setting for examining the empirical regularities that are associated with bargaining failure since final offers salaries and player statistics which provide the fundamental facts for the case are all readily available using data for players eligible for arbitration for 1990 93 we conduct a wide variety of empirical tests regarding the relationship between aggressive offers and arbitration outcomes we find that aggressive offers by players trigger arbitration and that more aggressive offers are associated with inferior financial outcomes in arbitration overall clubs appear to outperform players in arbitration unexpectedly high or low offers are less common for players who have previously been through arbitration which suggests that learning occurs our results are inconsistent with simple one sided asymmetric information models of arbitration the results are more consistent with an optimism model or a model in which so

arbitration and bargaining across the pacific this paper reports laboratory experiments comparing arbitration behavior between and across two countries with extensive trade relations the united states and japan besides comparing disputes in both locations we evaluate disputes between them while we find nominal differences between the countries we observe significant changes in both groups behavior when facing someone from the other country specifically americans seek larger profits when facing a japanese counterpart and japanese subjects settle more frequently with an american counterpart our results suggest that the literature on bargaining behavior across cultures paints an incomplete picture of international comparisons by failing to consider bargaining interactions

insurance premium allocation and loss prevention in a large firm a principal agent analysis abstract faced with increased insurance costs large firms are turning to a more systematic allocation of premium costs to subsidiaries an approach which capitalizes on economies of scale in a corporate wide management of aggregated risks risk pooled across divisions as well as subsidiaries such practice however raises a number of problems i what part of the aggregate risk should the firm self insure ii how should premium costs be allocated between subsidiaries iii how much effort should subsidiaries invest in loss prevention programs and how should they manage claims i e co insure themselves iv how can the parent firm induce managers of subsidiaries to control subsidiaries risk thereby reducing future premium payments and moral hazard or what premium incentive scheme can the firm devise to penalize or compensate subsidiaries investing less than an optimal effort in loss prevention to deal with these problems a conceptual framework based on a principal agents analysis and the definition of a liability account for each subsidiary is developed which is used to reduce the problems of moral hazard due to a less than perfect or indirect monitoring system specifically assumption regarding the premium allocation incentive scheme are made and explicit solutions are obtained for the control of subsidiaries loss prevention effort allocation

production organization and efficiency during transition an empirical analysis of east german agriculture enterprise restructuring is expected to improve efficiency in transition economies with data from former east germany we compare the efficiency of family farms and partnerships with large scale successor organizations of the collective and state farms lsos using parametric and nonparametric techniques we show that lsos display lower technical efficiency than do family farms and partnerships but that this difference is small and declining during transition mainly as a result of structural changes in agriculture family farms are not as scale efficient as partnerships and lsos and partnerships are superior to all other organizational forms

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

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

the dynamics of pretrial negotiation it is shown that many cases proceed to court despite ample opportunity for interaction and much of the settlement takes place on the courthouse steps the deadline effect when fixed costs of bargaining are introduced a u shaped pattern of settlement appears with a greater chance of settlement at the beginning and at the end of negotiations than in the middle these characteristics persist even as the time between offers approaches zero the theoretical predictions are consistent with the stylized facts a large proportion of the lawsuits that are settled out of court are settled very close to the trial date or in the first several days of the trial 3 although the deadline effect appears in many other settings as well it has little theoretical support 4

congestion and network externalities in the short run pricing of information system services transfer pricing provides management with an efficient tool for coordinating the use of information system services in practice these services if they are charged out to end users are priced via an allocation of historical costs based on individual usage or are assigned a price based on the fair market value of outside alternatives both approaches encourage suboptimal usage of information systems resources they ignore three constituents of optimal transfer prices 1 the reaction of other users to any change in a given user s consumption of service 2 the technical response to additional use of an information system service in the form of congestion and network externalities and 3 end user preferences for the information system service together these influences on demand contribute to an externality two types of externalities are significant in information systems congestion externalities decrease and network externalities increase the utility of services this research provides a complete model for computing optimal transfer price which corrects several existing problems in information system service valuation when full absorption cost allocations contain significant fixed precommitted or sunk cost components it is not possible to balance the budget direct costing improves on full absorption costing but misspecifies costs when demand is nonlinear to balance the budget with a minimum of disutility to end users management must resort to second best pricing inefficiency arises from two sources when externalities are ignored in transfer pricing end users cannot plan service usage and thus encounter unanticipated congestion which lowers morale and efficiency and increases costly expediting where congestion effects are highly nonlinear congestion may effectively shut down the system on the other hand incorrect transfer prices can motivate usage too low to take advantage of network benefits end users may confuse externality effects and intrinsic value of an information system service in these cases the price and performance of outside alternatives exert a complex and subtle influence on use and pricing of services where there exist identical outside and inside processing alternatives and transfer pricing does not reflect this there is a significant tendency to overprice and underutilize internal services in this case there may be a tendency to outsource when processing should be kept in house future markets for information systems will favor technologies which exhibit strong network externalities and pricing of these technologies will become increasingly complex because of the interrelationship of hardware software and data originated externalities the models provided in this research will allow management to take advantage of these opportunities

the selection hypothesis and the relationship between trial and plaintiff victory this paper develops implications of the selection hypothesis of priest and klein for the relationship between trial rates and plaintiff win rates i find strong evidence for the selection hypothesis in estimated relationships between trial rates and plaintiff win rates at trial across case types and judges i then structurally estimate the model on judge data yielding estimates of the model s major parameters the decision standard the degree of stake asymmetry and the uncertainty parameter for each of three major case types contracts property rights and torts

the effects of risk aversion on production decisions in decentralized organizations this paper presents a principal agent model in which subsequent to contracting the risk averse agent becomes informed about the production process communication of the agent s information is always valuable the optimal contract given this information asymmetry is characterized by less production and a larger risk premium than when information is symmetric leading to an efficiency loss comparative statics show that the loss in expected production increases as the agent becomes more risk averse

the performance of private and cooperative socialist organization postwar yugoslav agriculture socialist enterprises in yugoslav agriculture show higher levels of productivity than private producers the author examines the sources of these differences with total factor productivity estimates based on sectoral aggregate cobb douglas production functions which permit separation of environmental policy and organizational effects the results support the following conclusions cooperative socialist enterprises are not inherently inefficient and can even outperform private producers both types of producers were responding to their environment and their differential rates of technological change reflect the different constraints they faced and socialist enterprises exhibited technology adoption behavior similar to nonsocialist enterprises elsewhere copyright 1987 by mit press

effort technology and the efficiency of agricultural cooperatives abstract the inefficiency of cooperative agriculture relative to private farms is often attributed to difficulties in monitoring or poor incentives we develop a model to show that in technologies with numerous sequential steps even small shortfalls in worker effort can result in large output declines using data on cooperative and private farms in el salvador we find greater shortfalls in efficiency between cooperatives and private farms as well as among cooperatives for coffee a crop requiring numerous steps in its cultivation than for maize and sugar which require fewer steps thus the undersupply of effort in cooperatives may be less than differences in productivity suggest and cooperative agriculture is most likely to be successful where production does not involve many sequential steps

is private farming more efficient than socialized agriculture this paper examines the technical efficiency of state and private farms in poland for the period 1960 74 we find that the average technical efficiency of the two types of farms does not differ although the dispersion of efficiency levels is greater among state farms than among private ones we do find clear evidence of allocative inefficiency with state farms oversupplied with fertilizer and machinery

user delay costs and internal pricing for a service facility this paper studies optimal pricing and capacity decisions for a service facility in an environment where users delay cost is important the model assumes a general nonlinear delay cost structure and incorporates the tradeoff between the delay cost and capacity cost we find necessary and sufficient conditions for the optimality of a pricing rule that charges out service resources at their marginal capacity cost we examine the issue of budgetary balance and find that net value maximization entails a budget deficit for the service facility that is the service facility should be evaluated as a deficit center the results provide guidelines under which the optimal magnitude of the deficit can be determined

pricing and capacity decisions for a service facility stability and multiple local optima we consider a model for optimal pricing and capacity for a service facility the problem is formulated as one of optimal design of a single server queueing system in which the design variables are the service rate and the arrival rate equivalently the price charged for admission the model is a variant of one introduced by dewan and mendelson we allow for an upper bound on the arrival rate and consider slightly more general user value functions we show that an optimal solution may not lie in the interior of the feasible region and thus may not be characterized by the first order differential conditions moreover the first order conditions typically have several solutions some of which may be relative minima and produce a negative value of the objective function customer value minus the sum of expected delay cost and capacity cost per unit time we also examine the stability of the equilibrium arrival rate and the convergence of a dynamic adaptive algorithm for finding the optimal service rate in the context of a model in which the distribution of customers value of service is uniform we show that the equilibrium arrival rate is stable if and only if the service rate is above a threshold value which depends on the price charged for admission and the parameters of the uniform distribution of value of service the dynamic adaptive algorithm always converges to a relative maximum of the objective function if the service rate can be adjusted every time the arrival rate changes otherwise the algorithm will start to diverge if and when the service rate ever falls below the threshold value associated with stability of the equilibrium arrival rate

coordinating supply chains with competition capacity allocation in semiconductor manufacturing abstract this paper motivated by the experiences of a major us based semiconductor manufacturer presents an integrated model of incentive problems arising in forecasting and capacity allocation our model involves multiple product managers and multiple manufacturing managers who forecast the means of their respective demand and capacity distributions a central coordinator is responsible for allocating capacities to product lines when these distributions are unknown to the central coordinator and capacity is scarce the managers misrepresent their forecasts a product manager inflates his forecast to gain a greater allocation of the capacity a manufacturing manager deflates his forecast to cover for the uncertainties in production we propose a game theoretic model and design a mechanism a bonus scheme for all managers and an allocation rule to allocate realized capacity to the product managers that elicits truthful reporting by all managers the results herein show that the structure of the truth eliciting bonus schemes is rather simple with easily calculable parameters we also show that large classes of allocation rules including the current allocation practice of the firm are manipulable a bonus is often required for elicitation of truthful information we synthesize the implications of our results for the practitioners

project assignments when budget padding taints resource allocation this paper shows that rotation programs can be an effective response to concerns of employee budget padding rotation programs naturally create a portfolio of assignments for each manager and the resulting diversification can reduce the downside of resource rationing in particular the production versus rents trade off linked with adverse selection problems can be more efficiently carried out when the firm faces two managers with average information advantages rather than one with a large advantage and one with a small advantage roughly stated rotation of project assignments is a way of smoothing information across managers on the other hand if a firm places a premium on treating different types of projects in distinct ways specialized assignments can be preferred due to the ability to confine project types to individual 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

cost allocation and opportunity costs one explanation for the widespread use of allocated fixed costs is that they can serve as a proxy for difficult to calculate opportunity costs this explanation is pursued by modeling a service department as an m m s s queueing system two main results are that the expected value of opportunity costs equals both the incremental productivity of capacity and the optimal transfer price when the cost of capacity is of the form cs as and is close to one we show that allocated fixed costs are a good proxy for average opportunity costs however if there are great economies of scale is close to zero then a method which charges users only for the variable costs of the service department is recommended finally the economic efficiency of transfer prices based on either variable cost or full cost is compared with optimal transfer pricing policies

incentive contracts when production is subcontracted abstract the problem of pricing for products under subcontracting is set in an agency theory format characteristics of decentralization moral hazard and adverse selection are inherent in this problem optimal incentive compensation function and the transfer price are analyzed the results are illustrated with an example of logarithm utility functions

the timing of arbitration and sequential bargaining this paper links two literatures the paper adds to results on disagreement in per fect information bargaining games it is found that under certain conditions the possibility of third party intervention induces delay the paper is also the first attempt to model the arbitration process in a sequential bargaining framework it therefore adds to the theoretical arm of the industrial relations literature by permitting an explicit temporal setting for the chilling effect and alternative mechanisms for the timing of arbitration

on manufacturing marketing incentives stereotypically marketing is mainly concerned about satisfying customers and manufacturing is mainly interested in factory efficiency using the principal agent agency paradigm which assumes that the marketing and manufacturing managers of the firm will act in their self interest we seek incentive plans that will induce those managers to act so that the owner of the firm can attain as much as possible of the residual returns one optimal incentive plan can be interpreted as follows the owner subcontracts to pay the manufacturing manager a fixed rate for all capacity he delivers each marketing manager receives all of the returns from his product in turn all managers pay a fixed fee to the owner under this plan the marketing managers will often complain about the stock level decisions even though these levels are announced in advance under a revised plan the owner can eliminate such complaints by delegating the stocking decisions to the respective marketing managers without any loss this plan is interpreted as requiring the owner to make a futures market for manufacturing capacity paying the manufacturing manager the expected marginal value for each unit of capacity delivered receiving the realized marginal value from the marketing managers and losing money on average in the process

efficiency in social versus private agricultural production the case of yugoslavia this paper extends the work of michael l boyd 1987 by examining the question of efficiency in yugoslavian agricultural production using the stochastic production frontier the authors fin d the private sector produces with higher output efficiency than the social sector next they examine regional efficiency differences the authors findings reinforce earlier analysis of the economic impact of regional development policy pursued in yugoslavia less developed republics appeared unable to utilize efficiently the large volume of investment resources allocated from the more developed republics via the central government copyright 1993 by mit press

cooperation in the budgeting process in this article i analyze the role of cooperation between firm divisions in the budgeting process i study a setting in which cooperation is a necessary condition for information sharing among division managers which in turn benefits the principal the results in this article can help reconcile the differing views between practitioners and academic researchers on the desirability of cooperation in the budgeting process the results also have implications for some common budgeting processes observed in practice including bundling budgeting and bottom up budgeting

strikes and wages a test of an asymmetric information model this paper describes a simple model of labor disputes based on the hypothesis that unions use strikes to infer the profitability of the firm the model posits the existence of a negatively sloped resistance curve between wages and strike duration in addition it offer a series of predictions relating wage and strike outcomes to changes in the expected profitability of the firm and changes in the alternative opportunities of striking workers these implications are tested using data on wage outcomes strike probabilities and strike durations for a large sample of collective bargaining agreements

a rationalization of bonuses penalties and kinked payment functions within an agency model abstract the optimal payment schedule of the simplest principal agent problem can be continuous smooth or kinked or semicontinuous depending on the specifications of objective functions of the principal and or of the agent using the nonsmooth mathematical analysis this article determines a mapping from classes of objective functions into classes of optimal payment functions examples provide illustrations

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

how should the cost of joint risk capital be allocated for performance measurement we consider the problem of allocating the cost of risk capital based on value at risk var for performance measurement in a decentralized organization with several divisions the focus of the analysis is on fair risk capital allocation schemes to this end we analyze several well known allocation schemes in the context of a model based on cooperative game theory using the core concept we provide theoretical evidence that two allocation schemes the beta method and the nucleolus method turn out to perform best in allocating the cost of risk capital a simulation study shows that another allocation method the cost gap method shows similar results however within an experiment we obtain empirical evidence that the core concept is of minor importance with respect to individually perceived fairness subjects tend to favor simple allocation rules such as the activity level method and the beta method in summary only the beta method can be considered to be fair both from a normative and a descriptive point of view

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

hierarchical structure and responsibility accounting the literature on responsibility accounting offers two broad imperatives first a manager is best evaluated based on what he controls second responsibility follows a hierarchical arrangement the departmental manager is responsible for the controllable departmental activities the plant manager is responsible for the activities in the various departments within the plant the division manager is responsible for the aggregate activities of various plants and so on this literature embodies a variety of theories of behavior and organization examples include expectancy theory ronen and livingstone 1975 and brownell and mcinnes 1968 contingency theory bruns and waterhouse 1975 and merchant 1984 neoclassical economics gordon 1964 and principal agent modeling baiman 1982 principal agent modeling emphasizes information asymmetries in understanding responsibility accounting in particular the link between controllability and informativeness holmstrom 1979 1982 baiman and demski 1980 and antle and demski 1988 has been well explicated and the use of relative performance evaluation antle and smith 1986 demski and sappington 1984 and ma moore and turnbull 1988 has received significant attention 1 far less attention has been afforded the hierarchical aspect of responsibility accounting this is the focus of our analysis

resource allocation under demand uncertainty and private information we study the effect of multilateral private information on the efficiency of markets where capacity constrained upstream agents supply a resource to downstream entities facing uncertain end demands we analyze two models a pooling system in which a single downstream principal pools a resource from multiple upstream agents and a distribution system in which one upstream principal allocates a resource across multiple downstream agents we show that the presence of multilateral private information does not hinder efficiency in the pooling system in contrast in the distribution system the quantities allocated to downstream agents can exceed as well as fall short of their first best levels these results shed light on the recently improved performance of u s agricultural produce market and the observed episodes of shortages oversupplies in flu vaccine and other seasonal markets this paper was accepted by manel baucells decision analysis