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

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

nash implementation a complete characterization the authors extend e maskin s results on nash implementation first they establish a condition that is both necessary and sufficient for nash implementability if there are three or more agents the case covered by maskin s sufficiency result second and more important they examine the two agent case for which there existed no general sufficiency results the two agent model is the leading case for applications to contracting and bargaining for this case too they establish a condition that is both necessary and sufficient the authors use their theorems to derive simpler sufficiency conditions that are applicable in a wide variety of economic environments copyright 1990 by the econometric society

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 in multidivision firms information agency and incentives author s bernardo antonio e cai hongbin luo jiang abstract we consider a firm with two investment projects divisions each run by a manager who can provide i unverifiable information about the quality of either or both projects and ii unverifiable access to valuable resources that can enhance the cash flows of either or both projects we then examine the extent to which capital allocation and managerial compensation schemes can be designed jointly to mitigate the information and incentive problems within the firm we find that the firm underinvests in capital in both projects relative to the first best level optimal managerial profit sharing increases in the quality of both projects and managers underinvest resources in both projects interestingly the underinvestment problem in one project is less severe when the other project is higher quality this effect will be stronger when the moral hazard problem is more acute and project returns are more highly correlated we also predict that multi division firms will invest more less than single division firms when other divisions in the firm perform well poorly

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

internal pricing and cost allocation in a model of multiproduct competition with finite capacity increments internal prices are used in practice to allocate central resources to a firms profit centers the fixed costs of capacity acquisitions are often included in these prices we examine the interaction between capacity acquisition and competition when capacity is available in fixed increments we find predictably that if the increments are small unit capacity cost is a good approximation for the internal price and if the increments are large the internal price is zero however the relationship between the internal price and the capacity increment for intermediate cases is quite irregular to the extent that it is not possible to approximate the internal price with accounting data the analysis also suggests that full cost allocation overcharges for the opportunity cost of capacity furthermore the right internal price does not act either as a way of recovering fixed costs or as a proxy for externalities such as congestion costs the conclusions are not materially altered in the case where variable costs increase at the margin and where these costs rather than hard capacity constraints are the reason to restrict output

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

coordination of internal supply chains in vertically integrated high tech manufacturing organizations htmos abstract this paper uses economic mechanisms to coordinate supply chains within high tech manufacturing organizations htmos it models the one shot initial production and allocation decisions involved in the production and marketing of new technologies these decisions are driven by the economic objectives of the firm and of the employees with private information the experts it analyzes and compares the efficiency of three coordination policies centralized command and control centralized revelation and decentralized revelation it shows that decentralized policies introduce an additional cost and it proposes rules of thumb for coordinating supply chains within firms that use many experts

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

the groves scheme profit sharing and moral hazard considered in this paper is the problem of intrafirm resource allocation two incentive schemes the groves scheme and profit sharing have been presented in the literature as ways of dealing with this problem under conditions of asymmetric information in the absence of effort aversion by division managers it has been shown that truth telling forms a dominant strategy equilibrium using the groves scheme and a nash equilibrium using profit sharing the analysis in this paper allows for the problem of moral hazard effort aversion as well as the problem of asymmetric information it is shown that for a deterministic case in which the headquarters seeks to maximize a measure of total profits gross of divisional rewards a reinterpreted groves scheme will yield a dominant equilibrium at this equilibrium the headquarters implicitly considers the division managers effort levels as a cost to the firm it is also shown that in the presence of moral hazard profit sharing will not generally yield a nash equilibrium furthermore profit sharing may encourage the transmission of misinformation by a division manager so as to change the division s capital allocation and reduce the effort level subsequently selected by the manager

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

strategic transfer pricing most research into cost systems has focused on their motivational implications this paper takes a different approach by developing a model where two oligopolistic firms strategically select their cost based transfer prices duopoly models frequently assume that firms game on their choice of prices product prices however are ultimately based on the firms transfer prices that communicate manufacturing costs to marketing departments it is for this reason that transfer prices will have a strategic component to them we derive implications for cost system choice and transfer pricing including showing that firms may cross subsidize their products a result consistent with the empirical evidence

rental housing markets the incidence and duration of vacancy and the natural vacancy rate abstract new intermetropolitan and time series data from the bls are used to derive and model the incidence and duration of rental vacancies and to assess their importance to the price adjustment mechanism for rental housing research findings indicate that duration varies with measures of msa housing costs and housing stock heterogeneity while incidence varies with measures of population mobility public housing availability and population growth results support a more general specification of rental price adjustment in which the rate of real rent change reflects deviations in observed vacancy incidence and duration from their equilibrium levels the research provides new estimates of equilibrium vacancy rates for a large set of metropolitan areas over the 1987 1996 period

implementation via nash equilibria this paper is concerned with a problem of implementation of a given social choice correspondence the authors introduces an essential monotonicity condition and show that any implementable social choice correspondence satisfies this condition conversely in a case of three or more participants any essentially monotone social choice correspondence is implementable in a case of two participants the essential monotonicity condition must be completed by a requirement that the social choice correspondence is close to an individually rational correspondence copyright 1992 by the econometric society

incentives for monitoring quality we analyze a procurement problem in which the quality of the delivered product can be observed perfectly by the buyer and supplier but may not be verifiable i e may not be observable to any third party we present a set of plausible conditions under which the equilibrium welfare of both the buyer and supplier is higher when quality is verifiable than when it is unverifiable the welfare gain for the privately informed supplier arises even when the buyer has all the bargaining power thus the interests of the buyer and supplier coincide with regard to whether delivered quality should be made verifiable

stability and chaos in input pricing for a service facility with adaptive customer response to congestion we consider the stability of the equilibrium arrival rate and equilibrium admission price at a service facility using a generalization of an input pricing model introduced by dewan and mendelson and further examined by stidham at the equilibrium the marginal value of service equals the admission price that is the sum of the admission fee and the expected delay cost stability means roughly that the system returns to the equilibrium after a perturbation assuming the customers base their join balk decisions on previous prices we extend the discrete time dynamic system pricing model of stidham to allow adaptive expectations in which customers predict the future price based on a convex combination of the current price and the previous prediction we show that this can lead to chaotic behavior when the equilibrium is unstable that is the price and arrival rate can follow aperiodic orbits which appear to be completely random our results suggest an alternative explanation for observed variations in the mean arrival rate to a queueing system which are often modeled by means of a random exogenous e g markovian environment process

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

housing market equilibrium almost without vacancies the swiss housing market is characterised by an extraordinarily low vacancy rate generally in the vicinity of 1 per cent is the swiss housing market permanently in a condition of severe shortage this paper uses both a standard non accelerating rent inflation rate of vacancy approach and a new perception based approach to answer this question the available evidence confirms that a vacancy rate of 1 1 5 per cent is indeed sufficient for the swiss housing market to be in equilibrium provided only dwellings that are not only unoccupied but also actually offered for rent or purchase are counted which makes this rate not easily comparable with other countries the standard equilibrium vacancy rate approach suggests that even lower rates are sufficient in more densely built places whereas the approach based on perceptions makes no difference this suggests that the dwellings listed by people who wish to move reduce the pressure on rents but not the feeling of housing shortage

cost based transfer pricing under r d risk aversion in an integrated supply chain abstract this paper examines the economic role of transfer pricing for a vertically integrated supply chain when a risk averse production division manager faces uncertainty on the outcomes from r d investment in particular we compare two representative cost based transfer pricing methods full cost and variable cost pricing we construct an economic model based on the assumption that r d investment reduces the expected fixed costs of a production factor as well as the variable production costs we show that a firm s profit under full cost transfer pricing is greater than that under variable cost transfer pricing under certainty contrary to this benchmark result variable cost pricing becomes more profitable than full cost pricing when the risk averse manager bears relatively high risk

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

competition and outsourcing with scale economies scale economies are commonplace in operations yet because of analytical challenges relatively little is known about how firms should compete in their presence this paper presents a model of competition between two firms that face scale economies i e each firm s cost per unit of demand is decreasing in demand a general framework is used which incorporates competition between two service providers with price and time sensitive demand a queuing game and competition between two retailers with fixed ordering costs and pricesensitive consumers an economic order quantity game reasonably general conditions are provided under which there exists at most one equilibrium with both firms participating in the market we demonstrate in the context of the queuing game that the lower cost firm in equilibrium may have a higher market share and a higher price an enviable situation we also allow each firm to outsource their production process to a supplier even if the supplier s technology is no better than the firms technology and the supplier is required to establish dedicated capacity so the supplier s scale can be no greater than either firm s scale we show that the firms strictly prefer to outsource we conclude that scale economies provide a strong motivation for outsourcing that has not previously been identified in the literature

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

concurrent pricing and lot sizing for make to order contract production abstract this paper develops a model for the simultaneous i e concurrent determination of the inventory and pricing policies of a supplier which produces and supplies a product to a buyer on the basis of a contractual agreement calling for the delivery of a specific quantity periodically assuming that the customer is rational i e it follows its own optimal purchasing policy the objective of the supplier is to determine the product s selling price in conjunction with an appropriate production inventory policy so that a predetermined gross profit level is achieved it is further assumed that the supplier s production batch size is an integer multiple of the buyer s order quantity in formulating a mathematical model of this situation the interactions between the product s price the buyer s economic order quantity and the supplier s selling price costs and profit are taken into account for solving this model a simple iterative algorithm is proposed which is illustrated through a numerical example sensitivity analysis performed on the model demonstrates that it is relatively robust and quite insensitive to errors in estimating the buyer s ordering to carrying cost ratio on the part of the producer

doing well by doing good green office buildings this paper provides the first credible evidence on the economic value of the certification of green buildings in the commercial sector value derived from impersonal market transactions rather than engineering estimates we match publicly available information on the addresses of energy star and leed rated office buildings to a commercial data source detailing the characteristics of u s office buildings and their rental rates we analyze the micro data on 694 certified green buildings and on 7489 other office buildings located within a quarter mile of the certified buildings we find systematic evidence that rents for green offices are about two percent higher than rents for comparable buildings located nearby effective rents i e rents adjusted for the occupancy levels in office buildings are about six percent higher in green buildings than in comparable office buildings nearby at prevailing capitalization rates conversion of the average non green building to an equivalent green building would add more than 5 million in market value these results are robust to the statistical models employed

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

budget selection when agents compete abstract a principal selects a budget k of how many projects to fund within an organization and then consults n agents each of whom has private information about his own project s value after receiving cheap talk reports from the agents the principal decides which projects to implement subject to the budget and agents report on new i i d projects every period until the budget is exhausted when the budget is small relative to the number of agents each of whom are biased towards their own projects competition between agents degrades the quality of information conveyed in equilibrium and lowers the principal s payoff a larger budget induces less competition and therefore may be selected in order to extract more information from the agents even though this leads to some unprofitable projects being adopted in an extension i find that a policy of never allowing a funded agent to seek funding again increases payoffs compared to when the agent can always re seek funding

internal capital markets and corporate politics in a banking group we analyze proprietary internal capital allocation data from a large retail banking group consisting of member banks and a headquarters organization we find that capital allocations from headquarters compensate for deposit shortfalls on the bank level suggesting that the headquarters offers deposit smoothing to member banks we then analyze how the distribution of influence within the group relates to capital allocations and lending behavior more influential banks are allocated more funds from headquarters and their loan growth is less sensitive to their deposit base the effects of influence are stronger if banks have a greater demand for deposit smoothing

dynamic resource allocation with hidden volatility abstract we study a firm s internal resource allocation using a dynamic principal agent model with endogenous cash flow volatility the principal supplies the agent with resources for productive use but the agent has private control over both project volatility and resource intensity and may misallocate resources to obtain private benefits the optimal contract can yield either overly risky or overly prudent project selection it can be implemented with a constant pricing schedule i e a static decentralized linear mechanism giving the agent control over the resource quantities project risk and agent s equity share the implementation rationalizes the use of hurdle rates above a firm s cost of capital and transfer prices above marginal cost while showing that hurdle rates or transfer prices may not vary with the agent s risk choice

nash implementation in pure public good economies abstract i study nash implementation in a model of pure public good economies without the controversial no veto power condition i prove that any social choice correspondence that is monotonic and satisfies unanimity and minimal liberty can be implemented in nash equilibrium

discount shock price rent dynamics and the business cycle the price rent ratio is highly volatile and predicts future returns for commercial real estate price rent variations in commercial real estate also tend to comove with investment and output we develop a general equilibrium model that explicitly introduces a rental market and incorporates collateral constraints on production as a key ingredient our estimation identifies discount rate shocks as the most important factor in 1 driving price rent variations 2 producing the long horizon predictability of real estate returns and 3 linking the dynamics in commercial real estate to those in the production sector

goal congruence analysis in multi division organizations with shared resources based on data envelopment analysis abstract in multi division organizations goal congruence between different divisions and top management is critical to the success of management in this paper drawing upon a nonparametric framework to model production technology we derive a necessary and sufficient condition for a firm with multiple divisions to be goal congruent and then extend it to a goal congruence testing measure which coincides with a data envelopment analysis dea model the goal congruence measure not only shows empirically whether the firm is goal congruent or not but also provides a measurement for the degree of goal incongruence to be goal congruent resources shared among divisions are suggested to be allocated so that the conditions for an optimizable operation are satisfied in addition goal congruent firms are verified to be cost efficient all findings in this research are examined and illustrated with a dataset of 20 bank branches with shared resources for service and sales divisions

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 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

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

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

corporate equity and commercial property market bubbles periodic sharp sustained increases and then reversals in asset prices lead many to posit irrational price bubbles the general case for bubbles is that asset prices simply move too much given the future cash flows the assets are reasonably likely to produce a corollary for property is that observed mean reversion in real cash flows is not reflected in investor valuations resulting in asset values being too high when real cash flows are high and vice versa this paper summarises some evidence on large corporate equity and commercial property price movements and present arguments for and against the existence of irrational bubbles

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

procurement with asymmetric information about fixed and variable costs we investigate optimal rationing of resources and organizational slack when a principal procures from an agent with private information about fixed and variable costs we study the problem in a two period setting with persistent types and investigate how the optimal rationing and slack depend on whether production increases or decreases over time we find that rationing in a dynamic model with persistent types is extra costly since the types that are eliminated in period 1 might have been attractive in period 2 the cost of rationing increases with the variability of production if production levels are increasing decreasing the principal will be cautious when eliminating types with low variable fixed costs in period 1 since these types are particularly profitable in period 2 when production is more stable over time harsher rationing can be applied in period 1 followed by less harsh rationing if any in period 2

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

resource allocation auctions within firms there is growing interest in the use of markets within firms proponents have noted that markets are a simple and efficient mechanism for allocating resources in economies in which information is dispersed in contrast to the use of markets in the broader economy the efficiency of an internal market is determined in large part by the endogenous contractual incentives provided to the participating privately informed agents in this paper we study the optimal design of managerial incentives when resources are allocated by an internal auction market as well as the efficiency of the resulting resource allocations we show that the internal auction market can achieve first best resource allocations and decisions but only at an excessive cost in compensation payments we then identify conditions under which the internal auction market and associated optimal incentive contracts achieve the benchmark second best outcome as determined using a direct revelation mechanism the advantage of the auction is that it is easier to implement than the direct revelation mechanism when the internal auction mechanism is unable to achieve second best we characterize the factors that determine the magnitude of the shortfall overall our results speak to the robust performance of relatively simple market mechanisms and associated incentive systems in resolving resource allocation problems within firms

incentive compatible pricing for a service facility with joint production and congestion externalities this paper considers the pricing problem of a service facility when services are jointly produced by the customers and the facility building on the work of mendelson 1985 we model the facility as a gi gi 1 queue with customer chosen service rates and linear delay costs we show that the service rates chosen by the customers based on their self interest are always suboptimal for the facility due to congestion externalities we derive optimal incentive compatible pricing schemes that can achieve optimal arrival rates and induce customers to choose optimal service rates for the case of systemwide net value maximization we show that the optimal incentive compatible pricing scheme consists of a variable fee that is proportional to the actual service time and a fixed rebate that is equal to a customer1s expected delay cost in the queue for the case of profit maximization of the facility we show that the optimal pricing scheme again consists of a fixed fee and a variable fee one insight from our analysis is that it may be appropriate for a service facility to reimburse each customer for his actual delay cost in the queue

international diversification and firm performance the s curve hypothesis a proposed theoretical framework for the study of multinationality and performance includes both benefits and costs of geographic expansion over different phases of internationalization data on 1 489 japanese firms over 12 years show a consistent horizontal x s shaped x relationship between multinationality and performance further firms investing more heavily in intangible assets such as technology and advertising achieved greater profitability gains from growth in foreign direct investment our framework and findings highlight complexity and temporal dynamics

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

anniversary article a perspective on asymmetric information incentives and intrafirm resource allocation the paper asymmetric information incentives and intrafirm resource allocation by harris kriebel and raviv was published in the june 1982 issue ofmanagement science in this article written as part of this journal s 50 year anniversary celebration we highlight the significance of the harris et al paper for research in managerial accounting we first formulate and solve a continuous version of the harris et al model to illustrate the key assumptions and findings of their paper we then review several strands of the resource allocation literature in managerial accounting that have taken their inspiration either directly or indirectly from the work of harris et al

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

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

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

optimal allocation and backup of computer resources under asymmetric information and incentive incompatibility abstract this paper presents the optimal allocation and backup of computing resources in a multidivisional firm in the presence of asymmetric information and incentive incompatibility a game theoretic model is developed and transformed to a linear programming problem the solution to this linear programming problem enables the corporate headquarters to design a resource allocation scheme such that the revelation principle prevails and all divisions tell the truth to cope with the combinatorial explosion of complexity caused by the resource constraint a greedy type algorithm and an averaged version of the original linear programming problem are developed to provide the upper and lower bounds the greedy type algorithm generates exact solutions for a wide range of instances the lower bounds coincide with the exact solutions for the cases where the computer resource is either scarce or abundant the averaged version resource allocation model with slight modifications solves the optimal computer backup capacity problem it determines how much back up capacity the firm should purchase when the firm s computer breaks down

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

optimal transfer pricing schemes for work averse division managers with private information abstract this paper models a decentralized firm under information asymmetry and effort disutility on the part of managers we assume that managers choose efforts before observing some private information however after the effort choice managers receive private information on their cost parameters which they report to the headquarters there exist many situations in which managers need to take efforts before obtaining private information for example the regular maintenance effort on the machine the effort on rd 2 under certain demand conditions managers cannot receive any information rent benefit for their private information even if they have the option to renege on the contract after obtaining their private information

housing vacancy and rental adjustment evidence from hong kong the traditional rental adjustment equation is flawed in that the equilibrium paths for the adjustment of rents and vacancy rates cannot hold simultaneously over time this paper suggests a two equation model of rental adjustments based on adaptive expectations rather than the single equation model presented in the traditional literature and provides empirical tests annual data from the housing market in hong kong during the 1980 96 period are consistent with the adjustment equation the results also show that the rate of change of real rents is neutral with respect to inflation

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

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

an approach to transfer pricing under uncertainty from the perspective of agency theory newer insights perhaps can be gained into issues of decentralization and transfer pricing transfer pricing can be viewed as a mechanism which simultaneously establishes proper incentives for the agent such as a divisional manager or a subcontractor and induces an optimal decision on the quantity of production when such a decision is delegated in a decentralized setting in this paper we consider a principal such as top management who delegates a production decision to an agent and wishes to induce proper decisions through proper compensation the word proper refers to whatever is optimal under the circumstances including uncertainty divergence of preferences and information asymmetry one example of such setting see below for a discussion of another scenario is the relation between a contractor principal and a subcontractor agent whereby production is subcontracted because of economies of scale and scope and there is no intermediate market for the transferred product the problem of devising an optimal transfer price mechanism in a world of certainty was addressed by ronen and mckinney henceforth rm 1971 they did not consider whether their transfer price mechanism generalizes to a world of uncertainty moreover their mechanism assumed that the divisional managers agents wish to maximize their respective divisional accounting profits and that there is only information asymmetry no moral hazard 1

contracting over multiple parameters capacity allocation in semiconductor manufacturing abstract this paper is a generalization of mallik and harker mallik s harker p t 2004 coordinating supply chains with competition capacity allocation in semiconductor manufacturing european journal of operational research 159 330 347 that presented an integrated model of incentive problems arising in forecasting and capacity allocation in that model multiple product managers and multiple manufacturing managers forecast the means of their respective demand and capacity distributions and a central coordinator allocates capacities based on these forecasts a mechanism that elicits truthful information from the managers was the main contribution of that paper the objective of this paper is to generalize our previous results to multiple statistics reporting this work assumes that the central coordinator can ask the managers to report multiple statistics mean and variance for example about their respective distributions we propose a game theoretic model and design a mechanism a bonus scheme and an allocation rule that elicits truthful reporting of all statistics by all managers it turns out that the structure of the optimal bonus schemes are rather simple with easily calculable parameters we also show that a large class of allocation rules are manipulable a bonus is often required for elicitation of truthful information we compare our results of multiple statistics reporting with those from mallik and harker 2004 we also characterize under what conditions the reporting of the extra information is of limited use

spatial variation in office rents within the atlanta region hedonic office rent models are estimated using data for atlanta that span the years 1990 96 controlling for typical building characteristics and lease terms we find that variables measuring locational differences in wage rates transport rates and proximity to concentrations of support services and office workers play an important role in explaining spatial variation in office rents no evidence is found in support of the hypothesis that technological advances in telecommunications have diminished the role played by face to face agglomeration economies in determining the intra metropolitan location of office firms

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

managerial expertise private information and pay performance sensitivity this paper characterizes optimal pay performance sensitivities of compensation contracts for managers who have private information about their skills and those skills affect their outside employment opportunities the model presumes that the rate at which a manager s opportunity wage increases in his expertise depends on the nature of that expertise i e whether it is general or firm specific the analysis demonstrates that when managerial expertise is largely firm specific general the optimal pay performance sensitivity is lower higher than its optimal value in a benchmark setting of symmetric information furthermore when managerial skills are largely firm specific general the optimal pay performance sensitivity decreases increases as managerial skills become a more important determinant of firm performance unlike the standard agency theoretic prediction of a negative trade off between risk and pay performance sensitivity this paper identifies plausible circumstances under which risk and incentives are positively associated in addition to providing an explanation for why empirical tests of risk incentive relationships have produced mixed results the analysis generates insights that can be useful in guiding future empirical research

dominant strategy implementation of bayesian incentive compatible allocation rules abstract a large literature on incentive mechanisms represents incentive constraints by the requirement that truthful reporting be a bayesian equilibrium this paper identifies mechanism design problems for which there is no loss in replacing bayesian incentive compatibility by the stronger requirement of dominant strategies we identify contexts where it is possible to change the transfer payments of an optimal bayesian mechanism so as to create dominant strategies and yet leave every participant s expected utility unchanged we also address the issue of multiple equilibria and unique implementation contexts where these results apply include auctions bilateral bargaining procurement contracting and intrafirm resource allocation

speed of adjustment in commercial real estate markets the 1980s were less than favorable to the u s real estate industry vast amounts of overbuilding occurred in most areas and in most property types commercial vacancy rates increased dramatically and rents fell both in nominal and real terms untoward events tax laws changes deregulation of financial institutions and a real estate depression in many areas of the country virtually halted speculative development and caused a freefall in real estate prices real estate credit markets were crippled by the decade long crisis in the sl 6 21 adjustment speeds are important for understanding future effects of real estate price changes and for interpreting recent events the higher the adjustment speed the greater the fraction of long run adjustment experienced so far the smaller the adjustments still to be expected and the lower the implied long run demand elasticity adjustment speeds also have important implications for macroeconomic policy there is reason to believe for example that the slow economic growth in the u s during the four years of the bush administration was attributable in large part to the massive overbuilding that occurred in commercial property markets during the 1980s and the relatively slow process by which unemployed resources have been absorbed into productive new endeavors 16 in what follows we propose and test a stock adjustment model of real estate investment the

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

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 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

price delivery time guarantees and capacity selection this paper studies the impact of using delivery time guarantees as a competitive strategy in service industries where demands are sensitive to both price and delivery time we assume that delivery reliability is crucial and investment in capacity expansion is plausible in order to maintain a high probability of delivering the time guarantee a mathematical framework is proposed to understand the interrelations among pricing delivery time guarantee and capacity expansion decisions specifically an optimization model is developed to determine the joint optimal selection of these three important decision variables with an objective of maximizing the average net profit we characterize the optimal decisions and study their qualitative behaviors as various parameters change we further present a numerical example to illustrate how the results of our model can be used to provide useful managerial insights for selecting the best competing strategies for firms with different operating characteristics our model and results are also applicable to a make to order manufacturing environment

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

nash equilibrium and welfare optimality if is a set of social alternatives a social choice rule scr assigns a subset of a to each potential profile of individuals preferences over a where the subset is interpreted as the set of welfare optima a game form or mechanism implements the social choice rule if for any potential profile of preferences 1 any welfare optimum can arise as a nash equilibrium of the game form implying in particular that a nash equilibrium exists and 2 all nash equilibria are welfare optimal the main result of this paper establishes that any scr that satisfies two properties monotonicity and no veto power can be implemented by a game form if there are three or more individuals the proof is constructive

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