towards an attention based view of the firm the central argument is that firm behavior is the result of how firms channel and distribute the attention of their decision makers what decision makers do depends on what issues and answers they focus their attention on what issues and answers they focus on depends on the specific situation and on how the firm s rules resources and relationships distribute various issues answers and decision makers into specific communications and procedures the paper develops these theoretical principles into a model of firm behavior and presents its implications for explaining firm behavior and adaptation 1997 by john wiley sons ltd

supply chain relationships and contracts the impact of repeated interaction on capacity investment and procurement consider a firm developing an innovative product due to market pressures production must begin soon after the product development effort is complete which requires that an upstream supplier invests in capacity while the design of the product and production process are in flux because the product is ill defined at this point in time the firms are unable to write court enforceable contracts that specify the terms of trade or the supplier s capacity investment however the firms can adopt an informal agreement relational contract regarding the terms of trade and capacity investment the potential for future business provides incentive for the firms to adhere to the relational contract we show that the optimal relational contract may be complex requiring the buyer to order more than her demand to indirectly monitor the supplier s capacity investment we propose a simpler relational contract and show that it performs very well for a broad range of parameters finally we identify characteristics of the business environment that make relational contracting particularly valuable

the substitutability of non fossil energy potential carbon emission reduction and energy shadow prices in china abstract the rapidly increasing consumption of energy and fossil fuel dominated energy structure have caused great pressure on energy security and carbon reduction policies in china and the chinese government has attempted to substitute fossil with non fossil energy to investigate the feasibility of replacing fossil energy with non fossil energy in china we apply an input distance function to estimate the substitutability of non fossil energy for fossil energy and compare shadow prices the result confirms the feasibility of substituting non fossil energy for fossil energy we then divide the non fossil energy into nuclear energy and renewable energy and find that nuclear energy is more suitable than renewable energy to substitute for fossil energy the shadow price ratio of non fossil to fossil energy is 268 41 on average in the study period the ratio experiences several fluctuations and shows a declining trend at the end of the study period implying that improving energy structure in china is very promising

substitution possibility between unpriced pulp and wastepaper in the u s paper and paperboard industry a greater use of recycled wastepaper would preserve virgin forests as well as reducing the amount of wastepaper going to landfills these environmental goals depend critically on the elasticity of substitution between pulp and wastepaper in producing paper and paperboard since most of the pulp consumed by u s paper mills and paperboard mills is transferred internally from vertically integrated pulp mills the price data on pulp is not available this paper constructs an econometric model which enables us to estimate the substitution possibility between unpriced pulp and wastepaper in the u s paper and paperboard industry empirical results show that the elasticity of substitution between unpriced pulp and wastepaper is positive but not statistically significant

the low carbon technology characteristics of china s ferrous metal industry abstract the ferrous metal industry is the largest energy consuming industrial sector in china this paper examines the low carbon production characteristics of this industry during the period 1980 2013 we employ the duality theory of the weighted russell directional distance function to propose a general procedure for modeling production characteristics with carbon emissions being considered the undesirable output using the weighted russell directional distance function model we measure the carbon adjusted technical efficiency and environmental regulatory costs for this industry to investigate policy effects we test the porter hypothesis using the granger causality between regulatory cost and technical efficiency by using the dual model of weighted russell directional distance function we estimate the carbon shadow pricing and inter factor substitution possibilities results show that the carbon adjusted technical efficiency and environmental regulation costs of the chinese ferrous metal industry have significantly increased in recent decades however the latter does not significantly cause the improvement of former the indirect morishima elasticities of substitution reflect that the increase of fixed assets will effectively improve the carbon emissions performance of the chinese ferrous metal industry finally some policy implications are suggested

public procurement with unverifiable quality the case for discriminatory competitive procedures unverifiable quality may affect the enforcement of procurement contracts even when the award procedure is able to select the most efficient firm in the market in this paper we show that a discriminatory competitive mechanism which awards the contract on the basis of price and firms past performance yields an efficient allocation of the contract and allows the buyer to implement her desired quality quality enforcement arises out of relational contracting whereby the buyer handicaps a contractor in future competitive tendering processes if it fails to provide the required quality we study an infinitely repeated procurement model with two firms and one buyer imperfectly informed on the firms cost in which in each period the buyer runs a discriminatory auction we restrict our analysis to the case of a buyer committed to her handicapping strategy a case which captures some of the features of a public buyer when players use either grim trigger or stick and carrot strategies we find that the buyer can induce the delivery of optimal unverifiable quality with a variety of handicap levels and when applicable durations of the punishment period for some values of the handicap and the length of the punishment period both firms remain active in the market even when punished

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

sustainable monetary policies abstract this paper uses a model with utility maximizing households monopolistically competitive firms and sticky goods prices to derive a version of barro and gordon s time consistency problem for monetary policy where the government s objectives are consistent with a representative household s preferences the paper applies the methods of chari and kehoe to characterize the entire set of time consistent or sustainable outcomes it goes on to find conditions under which the friedman rule the optimal policy under commitment can be supported when the government lacks a commitment technology

organizations as human communities and internal markets searching for duality business firms have been explained as internal markets or as communities to be sustainable however they need to reconcile these two constituting elements that have mainly been touted as opposite and part of a dualistic relationship we suggest that organizations may in alternative view market and community as part of a duality interdependent and mutually constituting processes that may not only contradict each other but also enable one another the implications of a duality view for business ethics which articulates market and community elements in a fruitful mutually enabling relationship are considered and duality is presented as a way of transcending what is commonly viewed as opposition moving organizations both in the direction of humane and competitive finalities

the role of market forces in assuring contractual performance the conditions under which transactors can use the market repeat purchase mechanism of contract enforcement are examined increased price is shown to be a means of assuring contractual performance a necessary and sufficient condition for performance is the existence of price sufficiently above salvageable production costs so that the nonperforming firm loses a discounted steam of rents on future sales which is greater than the wealth increase from nonperformance this will generally imply a market price greater than the perfectly competitive price and rationalize investments in firm specific assets advertising investments thereby become a positive indicator of likely performance

incomplete contracts and strategic ambiguity why are observed contracts so often incomplete in the sense that they leave contracting parties obligations vague or unspecified traditional answers to this question invoke transaction costs or bounded rationality in contrast the authors argue that such incompleteness is often an essential feature of a well designed contract specifically once some aspects of performance are unverifiable it is often optimal to leave other verifiable aspects of performance unspecified the authors explore the conditions under which this occurs and investigate the structure of optimal contracts when these conditions are satisfied copyright 1998 by american economic association

explaining the attacker s advantage technological paradigms organizational dynamics and the value network abstract understanding when entrants might have an advantage over an industry s incumbent firms in developing and adopting new technologies is a question which several scholars have explained in terms of technological capabilities or organizational dynamics this paper proposes that the value network the context within which a firm competes and solves customers problems is an important factor affecting whether incumbent or entrant firms will most successfully innovate in a study of technology development in the disk drive industry the authors found that incumbents led the industry in developing and adopting new technologies of every sort identified by earlier scholars at component and architectural levels competency enhancing and competency destroying incremental and radical as long as the technology addressed customers needs within the value network in which the incumbents competed entrants led in developing and adopting technologies which addressed user needs in different emerging value networks it is in these innovations which disrupted established trajectories of technological progress in established markets that attackers proved to have an advantage the rate of improvement in product performance which technologists provide may exceed the rate of improvement demanded in established markets this mismatch between trajectories enables firms entering emerging value networks subsequently to attack the industry s established markets as well

parametric efficiency tests economies of scale and input demand in u s electric power generation duality theory has been applied increasingly in recent years to study the structure of production a major advantage of using duality theory is that systems of input demand equations can be derived by simple differentiation facilitating the use of flexible functional forms also use of duality theory makes it possible to choose a representation of the technology which has desirable properties for estimation such as exogeneity of the regressors however the use of a dual representation of production structure is appropriate only if the corresponding maintained hypothesis concerning economic behavior e g cost minimization or profit maximization is valid the perceived advantages of the dual approach to studying production structure have led to some applications in which the maintained hypothesis concerning economic behavior is unlikely to be appropriate for example neoclassical cost functions have been used to study the characteristics of production in regulated industries despite an extensive theoretical literature indicating that a profit maximizing regulated firm would not minimize costs subject to market prices 2 in this paper we propose a generalized cost function that retains the principal advantages of the neoclassical cost function but does not require that cost minimization subject to market prices be imposed as a maintained hypothesis in our model firms are assumed to base their production decisions on unobservable shadow prices which reflect the effects of regulation on the effective prices of inputs parametric tests for cost minimization are obtained by expressing shadow prices as functions of market prices the generalized cost function is estimated with data for regulated electric utilities the parametric restrictions corresponding to cost minimizing behavior subject to market prices are rejected implying that the use of a neoclassical cost function is not appropriate in this application 3

subjective performance measures in optimal incentive contracts objective measures of performance are seldom perfect in response incentive contracts often include important subjective components that mitigate incentive distortions caused by imperfect objective measures this paper explores the combined use of subjective and objective performance measures in respectively implicit and explicit incentive contracts naturally objective and subjective measures often are substitutes sometimes strikingly so we show that if objective measures are sufficiently close to perfect then no implicit contracts are feasible because the firm s fallback position after reneging on an implicit contract is too attractive we also show however that objective and subjective measures can reinforce each other if objective measures become more accurate then in some circumstances the optimal contract puts more weight on subjective measures because the improved objective measures increase the value of the ongoing relationship and so reduce the firm s incentive to renege we also analyze the use of subjective weights on objective performance measures and provide case study evidence consistent with our analyses

the substitutability of nuclear capital for thermal capital and the shadow price in the korean electric power industry as part of ongoing efforts to reduce co2 emissions by increasing the proportion of the energy mix relying on nuclear power it may be useful to substitute nuclear power for thermal power wherever possible thereby substantially reducing the need to use fossil fuels in order to evaluate the contribution of nuclear power to potential co2 reduction this study examines the substitutability of thermal capital and nuclear capital in the korean electric power industry by utilizing the input distance function additionally the unit costs of thermal capital and nuclear capital are compared in terms of their shadow prices which are defined as the opportunity costs inherent to one additional unit of capital increase deriving from a reduction in labor the empirical results presented herein indicate that nuclear capital is readily substituted for thermal capital but the substitutability of thermal capital for nuclear capital is relatively low the shadow price ratio of nuclear capital to thermal capital is estimated to be 15 9 on average showing an upward trend over the years from 1982 to 2010

valuation of marginal co2 abatement options for electric power plants in korea the electricity generation sector in korea is under pressure to mitigate greenhouse gases as directed by the kyoto protocol the principal compliance options for power companies under the cap and trade include the application of direct co2 emission abatement and the procurement of emission allowances the objective of this paper is to provide an analytical framework for assessing the cost effectiveness of these options we attempt to derive the marginal abatement cost for co2 using the output distance function and analyze the relative advantages of emission allowance procurement option as compared to direct abatement option real option approach is adopted to incorporate emission allowance price uncertainty empirical result shows the marginal abatement cost with an average of 14 04 ton co2 for fossil fueled power plants and confirms the existence of substantial cost heterogeneity among plants which is sufficient to achieve trading gains in allowance market the comparison of two options enables us to identify the optimal position of the compliance for each plant sensitivity analyses are also presented with regard to several key parameters including the initial allowance prices and interest rate the result of this paper may help korean power plants to prepare for upcoming regulations targeted toward the reduction of domestic greenhouse gases

optimal procurement contracts under a binding budget constraint the traditional literature on agency models predicts that for zero liability contracts it is optimal for the principal to pay for the information he cannot observe however this principle is not valid for a set of contracts mostly used by government agencies whose distinguishing feature is represented by a stringent budget constraint for the principal this paper shows that in this environment the principal will either choose a structure exibiting pooling or a bargaining solution the bargaining solution represents the analytical proof to the intuition of the difficulty in implementing procurement contracts stated by laffont and tirole 1993

the existence of self enforcing implicit contracts implicit contracts are nontrivial nash equilibria to the post hiring trading game between a worker and the employer these are supported by intrafirm rather than labor market reputations the existence of an implicit contract that supports efficient trade is proved in a simple model

the interaction of implicit and explicit contracts in repeated agency abstract in a repeated principal agent model in which the agent s actions are observable to the principal but not verifiable in court the agent s incentives derive both from salary payments based on verifiable signals and from implicit promises by the principal of bonuses for good behavior explicit short term contracts are designed to enhance the effectiveness of the infinite horizon implicit contract between principal and agent in a constrained efficient equilibrium bonuses smooth the consumption path of the risk averse agent by moving in the opposite direction from salaries total consumption and expected discounted utility for the rest of the game journal of economic literature classification numbers c7 c73 d8

the effects of economic status and recent experience on innovative behavior under environmental variability an experimental approach we build and empirically test a model that predicts the display of innovative behavior as a function of environmental change with recent experience and economic status acting as moderators we start with the model developed by slevin 1971 which evolved from the so called innovation boundary this is the threshold beyond which the display of innovative behavior becomes attractive we show how environmental change creates uncertainty about the position of the innovation boundary however this uncertainty is reduced by recent experiences furthermore economic status serves as both an enhancer and an inhibitor of innovation our model was tested and largely confirmed in two experiments one conducted in a laboratory setting and one conducted as a discrete choice experiment currently experiments are rarely conducted in the field of innovation studies by presenting this evidence we also hope to encourage more authors to conduct experiments in their work

implicit contracts incentive compatibility and involuntary unemployment this paper considers the enforceability of employment contracts when employees performance cannot be verified in court so that piece rate contracts are not legally enforceable part i shows that there exists a variety of self enforcing implicit contracts modelled as perfect equilibria in a repeated game and characterizes all the wage and performance outcomes that can be implemented implementation requires a strictly positive surplus from employment the form of the contract depending on how this surplus is divided between firm and employee piece rate contracts and contracts with an informally agreed bonus can be made self enforcing but the use of severance pay and bonding does not extend the set of implementable allocations the resulting contracts resemble actual labor contracts more than do the contracts in standard principal agent models part ii analyses market equilibrium with these contracts also modelled as perfect equilibria in a repeated game and shows that many such equilibria exist unfilled vacancies and unemployed workers can co exist despite the existence of contracts that are potentially mutually beneficial for those jobs that are filled any division of the potential surplus is possible so that the market can have at the same time involuntary unemployment and vacancies that are unfilled despite filled jobs earning positive profits as a criterion for selecting equilibria a notion of renegotiation proofness is applied then either all workers are employed or all jobs filled but any division of the potential surplus is still possible the paper explores what further restrictions on beliefs give rise to a walrasian outcome in which all the potential surplus goes to the short side of the market and to an efficiency wage type outcome in which the potential surplus goes to the long side

moral hazard in high office and the dynamics of aristocracy both aristocratic privileges and constitutional constraints in traditional monarchies can be derived from a ruler s incentive to minimize expected costs of moral hazard rents for high officials we consider a dynamic moral hazard model of governors serving a sovereign prince who must deter them from rebellion and hidden corruption which could cause costly crises to minimize costs a governor s rewards for good performance should be deferred up to the maximal credit that the prince can be trusted to pay in the long run we find that high officials can become an entrenched aristocracy with low turnover and large claims on the ruler dismissals for bad performance should be randomized to avoid inciting rebellions but the prince can profit from reselling vacant offices and so his decisions to dismiss high officials require institutionalized monitoring a soft budget constraint that forgives losses for low credit governors can become efficient when costs of corruption are low

relational incentive contracts standard incentive theory models provide a rich framework for studying informational problems but assume that contracts can be perfectly enforced this paper studies the design of self enforced relational contracts i show that optimal contracts often can take a simple stationary form but that self enforcement restricts promised compensation and affects incentive provision with hidden information it may be optimal for an agent to supply the same inefficient effort regardless of cost conditions with moral hazard optimal contracts involve just two levels of compensation this is true even if performance measures are subjective in which case optimal contracts terminate following poor performance jel c73 d82 l14

potential cost savings from internal external co2 emissions trading in the korean electric power industry abstract korea plans to introduce an emissions trading scheme for the controlling greenhouse gas emissions in 2015 using shephard s 1970 output distance function we first estimate the shadow price of co 2 for power generators in the korean fossil fueled electric generation industry then by assuming that each power generator is required to reduce co 2 emissions by one ton we compute the potential cost savings from internal trading among generators within the same plant and from external trading across plants at prevailing market prices the results indicate that on average the generators paid 14 63 to abate one ton of co 2 emissions in 2007 plants realized additional gains through external trading in particular cost savings from trades between different fuel fired plants were substantial

formal measures in informal management can a balanced scorecard change a culture abstract we extend traditional agency theory by exploring the roles for formal measures when managerial behavior is not governed by rules formulas or contracts part i describes relational incentive contracts with informal weights on formal performance measures more importantly it also explores how formal measures could be used in models of informal management such as adaptation and coordination politics and influence leadership and informal authority part ii considers the benefits from allowing key stakeholders to develop their own potentially inferior performance measures the collaboration to create a balanced scorecard of performance measures can help change an organization s culture

discretionary monetary policy with costly inflation this paper considers how an output cost of inflation affects the discretionary inflation bias we show that conditions exist under which costly inflation actually increases this inflation bias

individual learning and cooperation in noisy repeated games we investigate whether two players in a long run relationship can maintain cooperation when the details of the underlying game are unknown specifically we consider a new class of repeated games with private monitoring where an unobservable state of the world influences the payoff functions and or the monitoring structure each player privately learns the state over time but cannot observe what the opponent learned we show that there are robust equilibria in which players eventually obtain payoffs as if the true state were common knowledge and players played a belief free equilibrium we also provide explicit equilibrium constructions in various economic examples copyright 2014 oxford university press

the folk theorem with imperfect public information the authors study repeated games in which players observe a public outcome that imperfectly signals the actions played they provide conditions guaranteeing that any feasible individually rational payoff vector of the stage game can arise as a perfect equilibrium of the repeated game with sufficiently little discounting the central condition requires that there exist action profiles with the property that for any two players no two deviations one by either player give rise to the same probability distribution over public outcomes the results apply to principal agent partnership oligopoly and mechanism design models and to one shot games with transferable utilities copyright 1994 by the econometric society

selective intervention and internal hybrids interpreting and learning from the rise and decline of the oticon spaghetti organization infusing hierarchies with elements of market control has become a much used way of simultaneously increasing entrepreneurialism and motivation in firms however this paper argues that such internal hybrids particularly in their radical forms are inherently hard to successfully design and implement because of a fundamental incentive problem of establishing credible managerial commitments to not intervene in delegated decision making this theme is developed and illustrated using the case of the world leading hearing aids producer oticon in the beginning of the 1990s oticon became famous for its radical internal hybrid the spaghetti organization recent work has interpreted the spaghetti organization as a radical attempt to foster dynamic capabilities by organizational means neglecting however that about a decade later the spaghetti organization has given way to a more traditional matrix organization in contrast an organizational economics interpretation of oticon organizational changes is developed this lens suggests that a strong liability of the spaghetti organization was the above incentive problem frequent managerial meddling with delegated rights led to a severe loss of motivation and arguably caused the change to a more structured organization refutable implications are developed and the discussion is broadened to more general issues of economic organization

contract theory and implications for perennial energy crop contracting abstract this article provides an overview of modern contract theory and discusses the implications of the theory for contracting for perennial dedicated energy crops we discuss some of the unique challenges of contracting for dedicated energy crops used for the production of advanced biofuels and survey some of the relevant concepts and research from the contract theory literature to address these challenges we focus primarily on the mechanism design or complete contracts approach to contracting which involves optimizing some objective function e g profits costs etc with respect to contract terms subject to important incentive constraints the solution to these optimization problems typically highlight important tradeoffs that a contract designer needs to consider in order to maximize profits and or minimize costs

fiscal stress and the production of public safety a distance function approach abstract faced with increasing crime rates but nonincreasing budgets local governments are seeking cost saving means of providing public safety this paper investigates a bureaucracy s response to fiscal stress as well as its ability to efficiently substitute civilian for uniformed personnel exploiting duality theory a distance function is used to model technology retrieve information concerning substitutability and shadow prices of personnel and test for cost minimization morishima elasticities are adopted to allow for asymmetry in substitution between types of personnel it is found that the more adverse the public safety environment and budgetary condition the more efficiently resources are allocated

holdups standard breach remedies and optimal investment in bilateral trading problems the parties may be hesitant to make relationship specific investments without adequate contractual protection we postulate that the parties can sign noncontingent contracts prior to investing and can freely renegotiate them after information about the desirability of trade is revealed we find that such contracts can induce one party to invest efficiently when courts impose either a breach remedy of specific performance or expectation damages moreover specific performance can induce both parties to invest efficiently if a separability condition holds expectation damages on the other hand is poorly suited to solve bilateral investment problems forthcoming the american economic review please contact the program in law and economics at boalt hall school of law uc berkeley berkeley ca 94720 for a copy of this paper

uncertainty and the inflation bias of monetary policy abstract the dynamic inconsistency model predicts that monetary policy will produce a positive inflation rate the introduction of multiplicative uncertainty into the model suggests that this bias towards inflation will be lower the more uncertain the effects of monetary policy

productive low morale abstract this paper models employment relationship as a repeated principal agent problem with private evaluation the efficient contracts exhibit correlated movements between lagged wage and current effort that are consistent with the positive feedback between pay and morale in practice low morale therefore is an integral part of a well functioning relationship

inflation tax rules and investment some econometric evidence this paper presents econometric evidence on the effect of tax incentives on business investment in the united states in the period from 1953 through1978 the analysis emphasizes that the interaction of inflation and existing tax rules has contributed substantially to the decline of business investment since the late 1960 s because the investment process is far too complex for any simple econometric model to be convincing i have estimated three quite different models of investment behavior the strength of the empirical evidence rests on the fact that all three specifications support the same conclusion more generally the analysis and evidence show that theoretical models of macroeconomic equilibrium should specify explicitly the role of distortionary taxes especially taxes on capital income the failure to include such tax rules can have dramatic and misleading effects on the qualitative as well as the quantitative properties of macroeconomic theories this paper was presented as the fisher shultz lecture at the fourth world congress of the econometric society 29 august 1980 in aix en province this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this abstract was borrowed from another version of this item

credence goods costly diagnosis and subjective evaluation we study contracting between a consumer and an expert the expert can invest in diagnosis to obtain a noisy signal about whether a low cost service is sufficient or whether a high cost treatment is required to solve the consumer s problem this involves moral hazard because diagnosis effort and signals are not observable treatments are contractible but success or failure of the low cost treatment is observed only by the consumer payments can therefore not depend on the objective outcome but only the consumer s report or subjective evaluation a failure of the low cost treatment delays the solution of the consumer s problem by the high cost treatment to a second period we show that the first best solution can always be implemented if the parties discount rate is zero an increase in the discount rate reduces the range of parameter combinations for which the first best can be obtained in an extension we show that the first best is also always implementable if diagnosis and treatment can be separated by contracting with two different agents

incentives between firms and within this paper reviews the significant progress in agency theory i e the economic theory of incentives during the 1990s with an eye toward applications to supply transactions i emphasize six recent models in three pairs 1 new foundations for the theory of incentive contracts 2 new directions in incentive theory and 3 new applications to supply transactions by reviewing these six models i hope to establish three things first the theory of incentive contracts needed and received new foundations second new directions in incentive theory teach us that incentive contracts are not the only source of incentives finally and especially relevant to supply transactions the integration decision is an instrument in the incentive problem

inertia and incentives bridging organizational economics and organizational theory organizational theorists have long acknowledged the importance of the formal and informal incentives facing a firm s employees stressing that the political economy of a firm plays a major role in shaping organizational life and firm behavior yet the detailed study of incentive systems has traditionally been left in the hands of organizational economists with most organizational theorists focusing their attention on critical problems in culture network structure framing and so on in essence the social context in which economics and incentive systems are embedded we argue that this separation of domains is problematic the economics literature for example is unable to explain why organizations should find it difficult to change incentive structures in the face of environmental change while the organizational literature focuses heavily on the role of inertia as sources of organizational rigidity drawing on recent research on incentives in organizational economics and on cognition in organizational theory we build a framework for the analysis of incentives that highlights the ways in which incentives and cognition while being analytically distinct concepts are phenomenologically deeply intertwined we suggest that incentives and cognition coevolve so that organizational competencies or routines are as much about building knowledge of what should be rewarded as they are about what should be done we argue that this recognition has important implications for our understanding of organizational inertia in the face of environmental change and that it opens up important new areas for further research

agency costs and innovation abstract stylized facts indicate that small firms are responsible for a disproportionate share of innovative research there are many possible explanations for this fact the paper seeks to understand this phenomenon as the outcome of an optimal assignment of tasks across individuals and organizations it is shown that incentive costs associated with a given task depend on the total portfolio of tasks that an individual or an organization undertakes mixing hard to measure activities innovation with easy to measure activities routine is particularly costly since it will either lead to misallocation of attention across tasks or to misallocation of risk larger firms are at a comparative disadvantage in conducting highly innovative research because of the costs associated with managing a heterogeneous set of tasks it is further argued that optimal organizational responses to coordination and control of routine tasks will lead to bureaucratization within the firm and to financial constraints imposed by capital markets both of which are hostile to innovation

communication in repeated games with imperfect private monitoring this paper examines repeated games in which each player observes a private and imperfect signal on the actions played and in which players are allowed to communicate using public messages providing incentives for players to reveal their observations generates revelation constraints that combined with signal imperfections may be a source of inefficiencies however by delaying the revelation of their observations players may economize on the cost of deterring deviations and thereby avoid these inefficiencies because a player would not want to trigger a sanction that would penalize him too revelation constraints also tend to make sanctions difficult to enforce however with at least three players detecting deviations may not require that all the players reveal their observations in that case we obtain a nash threat version of the folk theorem with two players we do not obtain a similar result nevertheless we show that an efficient outcome can almost always be approximated

short term contracts and long term agency relationships abstract long term contracts are valuable only if optimal contracting requires commitment to a plan today that would not otherwise be adopted tomorrow we show that commitments are unnecessary and hence short term contracts are sufficient if 1 all public information can be used in contracting 2 the agent can acess a bank on equal terms with the principal 3 recontracting takes place with common knowledge about technology and preferences and 4 the frontier of expected utility payoffs generated by the set of incentive compatible contracts is downward sloping at all times

top management s attention to discontinuous technological change corporate venture capital as an alert mechanism technological discontinuities pose serious challenges to top managers attention these discontinuities which often occur at the fringes of an industry are usually driven by innovative and often venture capital backed start ups creating new products and transforming existing industries in ways that are difficult for incumbent managers to understand against the backdrop of their existing cognitive schemata however failing to appreciate and embrace successful technological discontinuities might endanger incumbents very existence extending the attention based view we explore whether and how interorganizational relationships guide top managers attention either to or away from technological discontinuities we propose that homophilous relationships e g alliances with industry peers should exhibit a negative relationship with incumbents timely attention to technological discontinuities whereas heterophilous relationships e g with venture capitalists as a result of coinvestments should exhibit a positive relationship furthermore we hypothesize that the status of the partners strengthens the effect of homophilous and heterophilous relationships with the timely attention of top managers to technological discontinuities based on a longitudinal study of the incumbents in four information and communications technology industry sectors we find that heterophilous ties through corporate venture capital cvc coinvesting with high status venture capital firms exhibit a strong positive relationship with timely attention cvc when it connects senior management to high status venture capitalists through coinvestments has a special role in directing top managers attention to technological discontinuities and ensuing business opportunities implications for the understanding of the role of interorganizational ties as structural determinants of top managers attention are discussed

the moderating role of the complementary nature of technological resources in the diversification performance relationship this article analyzes the moderating role of complementary technological resources in the diversification performance relationship our contention is that entry into a new market poses challenges to complementary resources that are already being exploited and that diversification thus comes at a substantial cost to the diversifying firm using a sample of the world s largest manufacturers we find that the effect of diversification on productivity is positive for firms with an initially low level of overall technological complementarity firms that specialize and have existing complementarities are negatively affected by diversification because the process of unbundling and rebundling technological resources is disruptive to productive firms

money burning in subjective evaluation and limited liability a case for pay for performance abstract research on subjective evaluation in principal agent models have shown that the optimal contract should give uniform reward with zero money burning at all but the worst performance in a static game involving two independent tasks with only high or low output possible it is shown that when the agent is subjected to limited liability the optimal contract is more likely to exhibit pay for performance full money burning if both tasks yield low outputs partial money burning for mixed performance of low and high outputs and zero money burning following high output in both tasks

investing to cooperate theory and experiment we study theoretically and in a lab experiment investment decisions in environments where property rights are absent in our setting a player chooses an investment level before interacting repeatedly with a given set of agents the investment stochastically affects the payoffs of the game in every subsequent period we show that more volatile returns make investment more difficult in the absence of legal protection and might force the investor to invest more to guarantee cooperation experimental results are broadly consistent with the theoretical findings

subjective evaluations with performance feedback this paper models two key roles of subjective performance evaluations their incentive role and their feedback role the paper shows that the feedback role makes subjective pay feasible even without repeated interaction as long as there exists some veri able measure of performance it also shows that while subjective pay is helpful it cannot achieve full e ciency however fully e cient incentives are achievable if the rm can commit to a forced distribution of evaluations and employs a continuum of workers with a small number of workers a forced distribution is valuable only if the veri able measure is poor

endogenous verifiability and relational contracting for contracting parties it will often be uncertain whether a legal court is able to enforce the real intents of their contract the strict requirements of verifiability make it costly if not impos sible for parties to arrange their transactions and design their contract in a way that makes it completely protected by the court a way out is then to rely on self enforcing relational con tracts through repeated transactions the parties can make it costly for each other to breach the contract by letting breach ruin future trade but the self enforcing range of contracts is limited so the court s ability to enforce a contract is not without consequence for the contracting parties if possible the parties may thus have incentives to take costly actions that affect the ability of the court both ex ante preparations in terms of detailed contracting and ex post revelation of informa tion can increase the probability of fair court enforcement in this paper we focus on the former assuming that the parties are able to improve the verifiability of the contracted actions by care ful ex ante contract specifications we assume that careful contracting can improve the court s ability to verify whether an action conforms to the one described in the contract then we ask what happens to the self enforcing contract equilibrium if a party takes actions ex ante that affect the probability of verification in order to provide some answers we analyze a simple repeated principal agent game where the verifiability of the agent s actions is endogenously determined by the principal s investments in drafting an explicit contract pertaining to the quality of the agent s output the model makes it possible to identify some subtle effects of two key enforcement devices legal courts and repeated interaction note that by endogenizing verifiability we also endog enize the degree of contractual incompleteness and the equilibrium level of incompleteness will depend on the verification technology i e the resource costs that are necessary to achieve various verifiability levels this verification technology will be influenced in an essential way by the quality of courts in fact we can use the model to study relationships between two distinct aspects of courts namely their ability which influences the verification technology and their predictability which manifests itself in the equilibrium level of verifiability i e the probability with which the court in fact will verify the relevant action the repeated game approach formalizes an economic concept of trust and trustworthiness since a party honors trust if the present value of honoring exceeds the present value of abusing it the discount factor is then a proxy for the trust level in the relationship by studying the effect of variations in verification technology and the discount factor we can gain insight into the rela tionship between court ability explicit contracting trust and relational contracting below we summarize the results

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

compensating corporate venture managers this article reports the results of a questionnaire survey addressed to ceos of fortune 500 companies concerning incentive practices for venture managers data was also collected for venture performance history in these companies highlights of the results are most companies are not providing different incentives for venture managers than for other managers companies that do and companies that do not provide special incentives seem to agree on the types of incentives which would promote improved venture performance which include milestone bonuses equity and or options in the new venture variable bonuses based on venture roi the primary obstacle to installing such incentives is reported by firms without special incentives in place to be concern about internal equity firms with special incentives already in place have less concern with this problem a moderate problem to such firms is difficulty in defining venture objectives there is no evidence from this study that special incentives for venture managers affected the outcome in venture performance when such performance was measured by the percentage of successes and failures about 50 success rate was reported by each group the article deals with these questions are performance incentives essential certainly not from the data in this sample but this was a head count of successes and failures a study of overall economic performance might yield a different result one expensive failure can wipe out the gains from many small successes are the incentives reported effective obviously not enough to show a difference between those who use them and those who don t analysis of the incentive elements used and the earnings limits imposed suggest that the special incentives are not particularly special nor very much of an incentive further the most common incentive reported based on venture roi fails to consider the time period usually required to achieve a positive roi and the many changes of management which occur during that period what criteria should be used for designing an incentive program for venture managers recognition of the probability of management change incentives which promote early identification of need for change of direction or to abort focus on event completion milestones rather than the calendar the relationship of reward potential to risk potential including job security and actual financial risk by the venture manager achievability and simplicity are factors to be considered what kind of financial incentives might be included in incentive design depending on the life cycle stage of the venture fixed and variable bonuses options for equity or shadow equity in the venture itself actual equity in the new venture and to a lesser extent salary increases and equity or equity options in the parent are suggested how can the obstacles to installation of performance incentives for venture managers be reduced to reduce perception of internal inequity relating potential risk to potential reward and extending performance incentives to other managers is suggested the problem of defining venture objectives as an obstacle is instantly solved as an incentive issue by making ownership possibility a reality for venture management especially with financial investment required by venture management

a deterministic parametric metafrontier luenberger indicator for measuring environmentally sensitive productivity growth a korean fossil fuel power case abstract this paper contributes to the current literature by proposing an alternative parametric metafrontier productivity approach called the deterministic parametric metafrontier luenberger productivity indicator dpmlpi for measuring environmentally sensitive productivity growth incorporating technological heterogeneities the luenberger productivity indicator is constructed based on a quadratic output directional distance function with undesirable outputs and then combined with the deterministic metafrontier to develop dpmlpi the dpmlpi can be decomposed into efficiency change technological change and productivity growth gap the productivity growth gap can be further divided into efficiency change gap and technological change gap the parametric linear programming technique is used to estimate parameters and construct the metafrontier an empirical study for the korean fossil fuel power industry at the plant level is conducted for the 2003 2011 period the results show a 0 15 increase in environmentally sensitive productivity growth which is mainly driven by environmental technological change the oil fired power plants show higher levels than the coal fired ones of environmentally sensitive productivity growth and technological change performance some related policy implications are also proposed for the korean fossil fuel power sector

management practices relational contracts and the decline of general motors abstract general motors was once regarded as the best managed and most successful firm in the world however between 1980 and 2009 gm s us market share fell from 46 to 20 percent and in 2009 the firm went bankrupt we argue that the conventional explanation for this decline namely high legacy labor and healthcare costs is seriously incomplete and that gm s share collapsed for many of the same reasons that many highly successful american firms of the 1960s were forced from the market including a failure to understand the nature of the competition they faced and an inability to respond effectively once they did we focus particularly on the problems gm encountered in developing the relational contracts essential to modern design and manufacturing and we discuss a number of possible causes for these difficulties we suggest that gm s experience may have important implications for our understanding of the role of management in the modern knowledge based firm and for the potential revival of manufacturi

ownership size and the formal structure of organizations evidence from us public and private firms 1992 2002 this study considers the effects of i ownership structure ii prior size dynamics of growth and decline and iii organizational size on changes in the formal structure of organizations using a broad sample of almost 70 000 us public and private firms i test the arguments by estimating conditional logistic regressions using as dependent variables two dimensions of organizational structural differentiation the number of formal subunits and hierarchical levels the findings show that public firms are more likely to elaborate structurally but less likely to simplify their structural differentiation as organizations grow decline in size they apparently tend to increase decrease their degree of structural differentiation however for a given change in size the level of structural differentiation is less likely to increase during growth than it is to decrease during decline indicating an asymmetric pattern i also find that organizational size can serve as a facilitator or inhibitor for structural change depending on the direction of change finally i find that the asymmetric pattern of growth and decline works differently for large and small firms the same proportional increase in size is more likely to generate structural differentiation for larger firms than for smaller firms but the same proportional decrease in size has a smaller likelihood of causing structural de differentiation for larger firms than for smaller firms copyright 2009 the author 2009 published by oxford university press on behalf of associazione icc all rights reserved oxford university press

multilateral contracting and the employment relationship this paper studies the structure of the employment relationship in organizations it investigates the trade off firms face between making commitments to their workforce as a whole multilateral relational contracts and making more limited commitments to individuals or smaller groups of employees bilateral relational contracts multilateral contracts bind the firm more strongly to implicit commitments improving motivation but are difficult to adjust in response to changes in the environment bilateral contracts make workforce changes easier to implement the framework helps to explain the use of relative performance evaluation why firms rely on temporary employees and the adoption of two tier workforces

endogenous institutional selection building trust and economic growth abstract private order market institutions founded on trust based relational contracts suffer adverse selection and moral hazard problems while public order market institutions have a limited capacity to enforce contracts i model agent selection between contract enforcement institutions and demonstrate that the state s contract enforcement capacity is complementary to private order contract enforcement institutions for low to moderate levels of public order enforcement capacity this suggests that initial improvements to public order institutions cause the accumulation of trust and result in economic growth in both institutions however i show that the private order institution must collapse once the public order contract enforcement capacity is too great

cognition capabilities and incentives assessing firm response to the fiber optic revolution this study examines how ceo cognition organizational capabilities and organizational incentives interacted to shape firm strategy during the fiber optic revolution i tested for these factors as

information sharing in a long term supply chain relationship the role of customer review strategy in this paper we study the practice of forecast sharing and supply chain coordination with a game theoretical model we find that in a one shot version of the game forecasts are not shared truthf

optimal contracting with subjective evaluation this paper extends the standard principal agent model to allow for subjective evaluation the optimal contract results in more compressed pay relative to the case with verifiable performance measures moreover discrimination against an individual implies lower pay and performance suggesting that the extent of discrimination as measured after controlling for performance may underestimate the level of true discrimination finally the optimal contract entails the use of bonus pay rather than the threat of dismissal hence neither efficiency wages nor the right to dismiss an employee are necessary ingredients for an optimal incentive contract

anticipated inflation and the capital stock in a cash in advance economy abstract an economy is constructed in which the steady state capital stock is inversely related to the rate of inflation as a result that is directly opposite the usual conclusion

a theory of hub and spoke collusion abstract we develop a model of hub and spoke collusion between a manufacturer and two retailers demand is stochastic and collusion between retailers is difficult the best collusive equilibrium is inefficient rotemberg and saloner 1986 in the hub and spoke collusive agreement retailers transmit their information about the state of demand to the supplier the supplier uses this information to adjust the wholesale price by organizing the collusion the supplier increases profits of the vertical chain we show that surprisingly this type of collusive agreement can under some conditions improve consumer welfare

decoding the adaptability rigidity puzzle evidence from pharmaceutical incumbents pursuit of gene therapy and monoclonal antibodies the emergence of radical technologies presents a significant challenge to incumbent firms we study firms management of radical technological change by separating their actions into upstream research the r of r d and downstream development the d of r d we introduce two contingencies to explain when incumbents research investments in radical technologies translate into product development and when these upstream investments may get voided by organizational inertia downstream first radical technologies can differ in how they conform to incumbents existing business models impacting the extent to which the movement of research outputs toward development will be subject to inertial pressures second incumbents can invest in a radical technology through a variety of modes internal research external research contracts alliances acquisitions these modes represent unique combinations of who does research and who is involved in the decision for subsequent development and hence differ in the extent to which they are shielded from inertial pressures this difference helps explain why incumbents despite responding to radical technologies may still be unable to adapt as well as what types of investments will be more effective in helping firms navigate technological change evidence from pharmaceutical incumbents pursuit of monoclonal antibodies and gene therapy offers strong support for our arguments

incentives equality and contract renegotiations theory and evidence in the chinese banking industry renegotiation plays an important role in contract theory but the empirical study of renegotiation is almost non existent in the literature using a unique dataset from the chinese banking industry we find that the large majority of managerial incentive contracts are renegotiated after performances are realized we develop a model of contract renegotiation where supervisors and managers sign incentive contracts and then renegotiate them in the unique equilibrium of the model incentive contracts are almost always renegotiated ex post even though renegotiation is fully anticipated incentive contracts affect performance the predictions of the model find strong support from our empirical results

governance and contract choice theory and evidence from groundwater irrigation markets abstract this paper examines the role governance institutions play in the adoption of contracts we develop a simple model of the contracting relationship in a setting where unverifiable outcomes exist and use it to interpret data on groundwater irrigation contracts in bangladesh a distinguishing feature of this market is the variety of village level institutions which impose different degrees of punishment for contract violation consistent with the model we find households adopt contracts that rely on unverifiable outcomes which are not formally contractible when punishment for contract violation is weak conversely households adopt contracts that rely on formally contractible and verifiable outcomes when punishment is severe this evidence is consistent with contract terms being chosen optimally given what is or is not formally contractible

endogenous emergence of credit markets contracting in response to a new technology in ghana abstract access to credit is important for the productivity and overall welfare of farmers in developing countries we present a theoretical framework which shows that a change in the mode of shipping from air to sea in the ghanaian pineapple industry made it profitable for pineapple exporters to provide myopic farmers with both in kind loans to improve productivity and cash loans for consumption smoothing despite being unable to monitor farmers or enforce repayment the innovative theoretical result is that providing farmers with additional cash loans can enforce greater input use without compromising repayment we provide evidence in the form of a case study documenting the dramatic rise of informal credit through contract farming after the switch to sea freight between 1996 and 2001 using this anecdote we argue that credit arrangements can arise spontaneously absent non market interventions to meet market needs even in the absence of proper legal protections for creditors

environmentally sensitive productivity analysis of the canadian pulp and paper industry 1959 1994 an input distance function approach abstract this study employs a parametric input distance function that incorporates both desirable and undesirable outputs to provide a more complete representation of the production technology from which environmentally sensitive productivity and efficiency measures can be generated this framework also generates pollution abatement cost estimates that are useful for policy making an input based malmquist index of productivity growth that appropriately credits the producer not only for increases in marketable or desirable outputs but also for the production of improved environmental quality through pollution abatement activities is derived from the input distance function the method was applied to time series data from the canadian pulp and paper industry our shadow price estimates indicate that the marginal cost to producers of pollution control has been rising the main conclusion of this study is that productivity improvement from the social viewpoint has been stronger than conventional measures would suggest

bringing the market inside the firm academics consultants and practitioners have long advocated bringing the market inside the firm for example in the 1950 s and 1960 s economists proposed that the transferpricing problem should be solved by charging market prices for internal transactions similarly in the 1980 s financial economists suggested that the capital allocation problem should be solved by charging the external cost of capital for internal investments and wave after wave of organizational restructuring has advocated radical decentralization empowerment intrapreneurship and the like in short making employees feel like owners proponents of making transactions within firms more market like often seem to ignore the factors that brought these transactions inside firms in the first place but bengt holmstrom and paul milgrom 1991 1994 holmstrom and jean tirole 1991 and holmstrom 1999 hereafter referred to collectively as hmt remind us that in some cases integration is efficient precisely because it eliminates market incentives in such cases bringing the market inside the firm would clearly be undesirable in this paper we show that bringing the market inside the firm is often not feasible even if it would be desirable more precisely if some aspects of the market transaction are noncontractible as we define below then it is impossible to replicate spot market payoffs inside a firm this result would be trivial if the firm s only instruments were court enforceable contracts it is impossible by definition for such contracts to replicate payoffs that were noncontractible in a spot market our contribution is to show that this result also applies to relational contracts i e self enforcing agreements in repeated games to establish this result we follow sanford grossman and oliver hart 1986 hart and john moore 1990 and hart 1995 hereafter referred to collectively as ghm in using asset ownership to determine whether a particular transaction is inside a firm and hmt in adding court enforceable contracts to asset ownership models we also draw on our own work baker et al 2001 to model relational contracts the resulting model is the first we know of that simultaneously analyzes asset ownership courtenforceable contracts and relational contracts

substitution possibilities for unpriced natural resources restricted cost functions for the canadian metal mining industry a bstract the effects of resource depletion on economic growth depend critically on the elasticities of substitution between non renewable natural resources and reproducible inputs estimation of the elasticities of substitution for natural resources has been hindered by the absence of data on their prices which results from the prevalence of vertical integration in natural resource industries in this paper we use the theory of restricted cost functions to develop a general procedure for estimating substitution possibilities for unpriced inputs estimation of the model with data for the canadian metal mining industry indicates that the elasticities of substitution for the natural resource metallic ore are equal to unity

the multiperiod principal agent problem in repeated principal agent models long term contracts can improve on short term contracts only if they commit either principal or agent to a payoff in some future circumstance lower than could be obtained from a short term contract negotiated if that circumstance occurs we show that efficient contracting under moral hazard alone does not require long term commitment from the principal provided a short term contract can punish the agent sufficiently in a sense made precise it requires no commitment from the agent either then linking payoffs in one period to outcomes in previous periods does not improve the tradeoff between incentives and risk sharing

dynamic business share allocation in a supply chain with competing suppliers this paper studies a repeated game between a manufacturer and two competing suppliers with imperfect monitoring we present a principal agent model for managing long term supplier relationships using a unique form of measurement and incentive scheme we measure a supplier s overall performance with a rating equivalent to its continuation utility the expected total discounted utility of its future payoffs and incentivize supplier effort with larger allocations of future business we obtain the vector of the two suppliers ratings as the state of a markov decision process and we solve an infinite horizon contracting problem in which the manufacturer allocates business volume between the two suppliers and updates their ratings dynamically based on their current ratings and the current performance outcome our contributions are both theoretical and managerial we propose a repeated principal agent model with a novel incentive scheme to tackle a common but challenging incentive problem in a multiperiod s

international lending with moral hazard and risk of repudiation in this paper i examine the constrained optimal pattern of capital flows between a lender and a borrower in an environment in which there are two impediments to forming contracts the first impediment to contracting arises from the assumption that lenders cannot observe whether borrowers invest or consume borrowed funds this assumption leads to a moral hazard problem in investment the second impediment arises from the assumption that the borrower as a sovereign nation may choose to repudiate his debts the optimal contract is shown to specify that the borrowing country experience a capital outflow when the worst realizations of national output occur this seemingly perverse capital outflow forms a necessary part of the optimal solution to the moral hazard problem in investment

self enforcing wage contracts we examine long term wage contracts between a risk neutral firm and a risk averse worker when both can costlessly renege and buy or sell labour at a random spot market wage a self enforcing contract is one in which neither party ever has an incentive to renege in the optimum self enforcing contract wages are sticky they are less variable than spot market wages and positively serially correlated they are updated by a simple rule around each spot wage is a time invariant interval and the contract wage changes each period by the smallest amount necessary to bring it into the current interval

how to get what you want when you do not know what you want a model of incentives organizational structure and learning in this paper we present a model of the interplay among learning managerial intervention and the allocation of decision rights in the context of a generalized agency problem within this context actors face not only conflicting interests but also diverging cognitive visions of the right course of action we assume that a principal may obtain the implementation of desired organizational policies by means of appropriate design of the allocation of decisions or by means of costly intervention through authority or incentives and we analyze their consequences for organizational control and learning we show that the structure of allocation of decision rights is very powerful in terms of control but when the principal is uncertain about the course of action organizational structure and managerial intervention complement each other in nontrivial ways and must be carefully tuned we also show that there is a general advantage in maximizing the partitioning decision rights because it allows both higher control and higher levels of learning