Optimal assignment and matching mechanisms have been the focus of exhaustive analysis. We focus on their dynamic effects, which have received less attention, especially in the empirical literature: anticipating that assignment is based on prior performance may affect prior performance. We test this hypothesis in a lab experiment. Participants first perform a task individually without monetary incentives; in a second stage, they are paired with another participant according to a pre-announced assignment policy. The assignment is based on first-stage performance and compensation is determined by average performance. Our results are largely consistent with theory: pairing the worst performing individuals with the best yields 20% lower first stage effort than random matching and does not induce truthful revelation of types, which undoes any policy that aims to reallocate types based on performance. Perhaps surprisingly, however, pairing the best with the best yields only 5% higher first stage effort than random matching and the difference is not statistically significant.
{"title":"Dynamic Incentive Effects of Assignment Mechanisms: Experimental Evidence","authors":"T. Gall, Xiaochen Hu, Michael Vlassopoulos","doi":"10.1111/jems.12315","DOIUrl":"https://doi.org/10.1111/jems.12315","url":null,"abstract":"Optimal assignment and matching mechanisms have been the focus of exhaustive analysis. We focus on their dynamic effects, which have received less attention, especially in the empirical literature: anticipating that assignment is based on prior performance may affect prior performance. We test this hypothesis in a lab experiment. Participants first perform a task individually without monetary incentives; in a second stage, they are paired with another participant according to a pre-announced assignment policy. The assignment is based on first-stage performance and compensation is determined by average performance. Our results are largely consistent with theory: pairing the worst performing individuals with the best yields 20% lower first stage effort than random matching and does not induce truthful revelation of types, which undoes any policy that aims to reallocate types based on performance. Perhaps surprisingly, however, pairing the best with the best yields only 5% higher first stage effort than random matching and the difference is not statistically significant.","PeriodicalId":248832,"journal":{"name":"Wiley-Blackwell: Journal of Economics & Management Strategy","volume":"16 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"118043413","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2008-05-06DOI: 10.1111/j.1530-9134.2008.00184.x
Annelies de Ridder, A. Rusinowska
We study two different ways of forming multi-partner alliances between firms with the central idea that procedure is an important factor in multi-partner alliance formation. In the first procedure, an alliance is formed simultaneously, while in the second, step-by-step procedure, members are added one by one. In the model we present, each firm is assumed to have a multidimensional maneuvering space, which consists of all alliance positions acceptable to the firm, and an ideal position in this space. Alliances will form between the firms whose maneuvering spaces overlap. The results of the analysis confirm that procedure is an important factor in multi-partner alliance formation. Nevertheless, if ideal positions of firms are acceptable to all alliance partners, then the result of alliance formation does not depend on procedure. In addition, it is shown that it can be disadvantageous to be a first mover. Finally, we are able to provide sufficient conditions under which one procedure is preferred in a three-partner case. More specifically, a firm with its ideal position acceptable to the two other firms may prefer the simultaneous procedure to being a late mover if (1) there is a certain balance in the firms' degree of flexibility and their power and (2) if the agreed alliance position of the two other firms is acceptable to the firm in question.
{"title":"On Some Procedures of Forming a Multipartner Alliance","authors":"Annelies de Ridder, A. Rusinowska","doi":"10.1111/j.1530-9134.2008.00184.x","DOIUrl":"https://doi.org/10.1111/j.1530-9134.2008.00184.x","url":null,"abstract":"We study two different ways of forming multi-partner alliances between firms with the central idea that procedure is an important factor in multi-partner alliance formation. In the first procedure, an alliance is formed simultaneously, while in the second, step-by-step procedure, members are added one by one. In the model we present, each firm is assumed to have a multidimensional maneuvering space, which consists of all alliance positions acceptable to the firm, and an ideal position in this space. Alliances will form between the firms whose maneuvering spaces overlap. The results of the analysis confirm that procedure is an important factor in multi-partner alliance formation. Nevertheless, if ideal positions of firms are acceptable to all alliance partners, then the result of alliance formation does not depend on procedure. In addition, it is shown that it can be disadvantageous to be a first mover. Finally, we are able to provide sufficient conditions under which one procedure is preferred in a three-partner case. More specifically, a firm with its ideal position acceptable to the two other firms may prefer the simultaneous procedure to being a late mover if (1) there is a certain balance in the firms' degree of flexibility and their power and (2) if the agreed alliance position of the two other firms is acceptable to the firm in question.","PeriodicalId":248832,"journal":{"name":"Wiley-Blackwell: Journal of Economics & Management Strategy","volume":"16 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-05-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"120700942","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2006-07-20DOI: 10.1111/j.1530-9134.2006.00118.x
Nolan Miller, Nikita Piankov, R. Zeckhauser
A price-setting seller faces a buyer with unknown reservation value. We show that if the buyer is sufficiently risk averse, the seller can benefit from employing a Possibly-Final Offer (PFO) strategy. In a PFO, if the buyer rejects the seller's initial offer the seller sometimes terminates the interaction. If the seller does not terminate, he follows up with a subsequent, more attractive offer. As the buyer's risk aversion increases, the seller's expected profit under the optimal PFO approaches the full-information profit. These results extend to contexts with endogenous commitment, multiple types of buyers, multidimensional objects, and nonseparable utility functions.
{"title":"Possibly-Final Offers","authors":"Nolan Miller, Nikita Piankov, R. Zeckhauser","doi":"10.1111/j.1530-9134.2006.00118.x","DOIUrl":"https://doi.org/10.1111/j.1530-9134.2006.00118.x","url":null,"abstract":"A price-setting seller faces a buyer with unknown reservation value. We show that if the buyer is sufficiently risk averse, the seller can benefit from employing a Possibly-Final Offer (PFO) strategy. In a PFO, if the buyer rejects the seller's initial offer the seller sometimes terminates the interaction. If the seller does not terminate, he follows up with a subsequent, more attractive offer. As the buyer's risk aversion increases, the seller's expected profit under the optimal PFO approaches the full-information profit. These results extend to contexts with endogenous commitment, multiple types of buyers, multidimensional objects, and nonseparable utility functions.","PeriodicalId":248832,"journal":{"name":"Wiley-Blackwell: Journal of Economics & Management Strategy","volume":"41 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2006-07-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116856738","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2006-07-20DOI: 10.1111/j.1530-9134.2006.00114.x
M. Katz
A large literature examines the use of observable and unrenegotiable agency contracts as commitments. These analyses generally impose an ad hoc restriction that contracts cannot be contingent on one another. I relax this restriction and obtain a folk theorem. Unlike earlier folk theorems in this area, the present result applies to agency relationships that have hidden-action problems. Using an example, I also demonstrate that there are settings in which interdependent contracts support a strictly larger set of equilibrium outcomes than do independent contracts. The result highlights the critical need for careful thought about restrictions placed on the set of feasible contracts.
{"title":"Observable Contracts as Commitments: Interdependent Contracts and Moral Hazard","authors":"M. Katz","doi":"10.1111/j.1530-9134.2006.00114.x","DOIUrl":"https://doi.org/10.1111/j.1530-9134.2006.00114.x","url":null,"abstract":"A large literature examines the use of observable and unrenegotiable agency contracts as commitments. These analyses generally impose an ad hoc restriction that contracts cannot be contingent on one another. I relax this restriction and obtain a folk theorem. Unlike earlier folk theorems in this area, the present result applies to agency relationships that have hidden-action problems. Using an example, I also demonstrate that there are settings in which interdependent contracts support a strictly larger set of equilibrium outcomes than do independent contracts. The result highlights the critical need for careful thought about restrictions placed on the set of feasible contracts.","PeriodicalId":248832,"journal":{"name":"Wiley-Blackwell: Journal of Economics & Management Strategy","volume":"57 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2006-07-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115138280","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2006-07-20DOI: 10.1111/j.1530-9134.2006.00115.x
V. Laux
This paper studies a setting in which a risk-averse agent must be motivated to work on two tasks: evaluating a potential project and, if the project is adopted, implementing it. Although a performance measure that is informative of an agent's action is typically valuable because it can be used to improve the risk sharing of the contract, this is not necessarily the case in this two-task setting. I provide a sufficient condition under which a performance measure that is informative of the agent's implementation effort is worthless for contracting despite the agent being risk averse. This shows that information content is a necessary but not a sufficient condition for a performance measure to be valuable.
{"title":"The Ignored Performance Measure","authors":"V. Laux","doi":"10.1111/j.1530-9134.2006.00115.x","DOIUrl":"https://doi.org/10.1111/j.1530-9134.2006.00115.x","url":null,"abstract":"This paper studies a setting in which a risk-averse agent must be motivated to work on two tasks: evaluating a potential project and, if the project is adopted, implementing it. Although a performance measure that is informative of an agent's action is typically valuable because it can be used to improve the risk sharing of the contract, this is not necessarily the case in this two-task setting. I provide a sufficient condition under which a performance measure that is informative of the agent's implementation effort is worthless for contracting despite the agent being risk averse. This shows that information content is a necessary but not a sufficient condition for a performance measure to be valuable.","PeriodicalId":248832,"journal":{"name":"Wiley-Blackwell: Journal of Economics & Management Strategy","volume":"82 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2006-07-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116312679","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2006-07-20DOI: 10.1111/j.1530-9134.2006.00117.x
J. Ganuza, Esther Hauk
We develop a stylized model of horizontal and vertical competition in tournaments with two competing firms. The sponsor cares not only about the quality of the design but also about the design location. A priori not even the sponsor knows his preferred design location, which is only discovered once he has seen the actual proposals. We show that the more efficient firm is more likely to be conservative when choosing the design location. Also, to get some differentiation in design locations, the cost difference between contestants can be neither too small nor too big. Therefore, if the sponsor mainly cares about the design location, participation in the tournaments by the two lowest-cost contestants cannot be optimal for the sponsor.
{"title":"Allocating Ideas: Horizontal Competition in Tournaments","authors":"J. Ganuza, Esther Hauk","doi":"10.1111/j.1530-9134.2006.00117.x","DOIUrl":"https://doi.org/10.1111/j.1530-9134.2006.00117.x","url":null,"abstract":"We develop a stylized model of horizontal and vertical competition in tournaments with two competing firms. The sponsor cares not only about the quality of the design but also about the design location. A priori not even the sponsor knows his preferred design location, which is only discovered once he has seen the actual proposals. We show that the more efficient firm is more likely to be conservative when choosing the design location. Also, to get some differentiation in design locations, the cost difference between contestants can be neither too small nor too big. Therefore, if the sponsor mainly cares about the design location, participation in the tournaments by the two lowest-cost contestants cannot be optimal for the sponsor.","PeriodicalId":248832,"journal":{"name":"Wiley-Blackwell: Journal of Economics & Management Strategy","volume":"163 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2006-07-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130715426","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2006-07-20DOI: 10.1111/j.1530-9134.2006.00116.x
Illoong Kwon
This paper studies a simple agency model where an agent's decision can affect his or her own future payoffs as well as the principal's. The threat of dismissal becomes an important part of an incentive scheme even if the principal can use the performance-based wage contract. However, if the agent's future payoffs depend on the past realized performance, but not on the past decision directly, or if the agent is risk-neutral, it is not optimal to use the threat of dismissal. As the agent's discretion over his future payoffs increases, the principal relies more on the threat of dismissal but less on the wage contract.
{"title":"Optimal Contracts for Long-Term Decisions and the Threat of Dismissal","authors":"Illoong Kwon","doi":"10.1111/j.1530-9134.2006.00116.x","DOIUrl":"https://doi.org/10.1111/j.1530-9134.2006.00116.x","url":null,"abstract":"This paper studies a simple agency model where an agent's decision can affect his or her own future payoffs as well as the principal's. The threat of dismissal becomes an important part of an incentive scheme even if the principal can use the performance-based wage contract. However, if the agent's future payoffs depend on the past realized performance, but not on the past decision directly, or if the agent is risk-neutral, it is not optimal to use the threat of dismissal. As the agent's discretion over his future payoffs increases, the principal relies more on the threat of dismissal but less on the wage contract.","PeriodicalId":248832,"journal":{"name":"Wiley-Blackwell: Journal of Economics & Management Strategy","volume":"21 5 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2006-07-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130660552","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2005-02-01DOI: 10.1111/j.1530-9134.2006.00110.x
P. Fulghieri, L. Hodrick
"This paper investigates the interaction between synergies and internal agency conflicts that emerges endogenously in multi-division firms. A divisional manager's entrenchment choice depends directly on the specificity of her division's assets, because the specificity governs whether entrenchment activities reduce the likelihood of her division being divested. The presence of synergies, by modifying the difference between the value of assets in their current use and in alternative uses, may alter the divisional manager's entrenchment incentive. In "the double-edged sword of mergers," synergy and internal agency effects are of opposite sign and merger gains may not be increasing in expected synergies. We characterize when divisions should optimally stand alone and when they should be part of a merged firm. We predict an absence of diversifying mergers in industries plagued by misdeployed assets, offer a novel explanation for the cross-sectional variation in postmerger valuation, and explain why mergers may be valuable "ex ante" while leading to successful divestitures ex post." Copyright 2006, The Author(s) Journal Compilation (c) 2006 Blackwell Publishing.
{"title":"Synergies and Internal Agency Conflicts: The Double-Edged Sword of Mergers","authors":"P. Fulghieri, L. Hodrick","doi":"10.1111/j.1530-9134.2006.00110.x","DOIUrl":"https://doi.org/10.1111/j.1530-9134.2006.00110.x","url":null,"abstract":"\"This paper investigates the interaction between synergies and internal agency conflicts that emerges endogenously in multi-division firms. A divisional manager's entrenchment choice depends directly on the specificity of her division's assets, because the specificity governs whether entrenchment activities reduce the likelihood of her division being divested. The presence of synergies, by modifying the difference between the value of assets in their current use and in alternative uses, may alter the divisional manager's entrenchment incentive. In \"the double-edged sword of mergers,\" synergy and internal agency effects are of opposite sign and merger gains may not be increasing in expected synergies. We characterize when divisions should optimally stand alone and when they should be part of a merged firm. We predict an absence of diversifying mergers in industries plagued by misdeployed assets, offer a novel explanation for the cross-sectional variation in postmerger valuation, and explain why mergers may be valuable \"ex ante\" while leading to successful divestitures ex post.\" Copyright 2006, The Author(s) Journal Compilation (c) 2006 Blackwell Publishing.","PeriodicalId":248832,"journal":{"name":"Wiley-Blackwell: Journal of Economics & Management Strategy","volume":"182 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2005-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132743945","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2005-01-01DOI: 10.1111/j.1530-9134.2006.00113.x
S. Masten
"This paper explores the functions and limitations of democratic governance by analyzing the allocation of decision-making authority in colleges and universities. Contrary to the conventional perception that large numbers and heterogeneity of voters and issues undermine the efficiency of democratic decision making, data on the allocation of authority for thirty-one decision areas in 826 US colleges and universities show democratic governance to be more prevalent in larger, "full-service" research universities than in smaller liberal arts colleges and special-curriculum institutions. State- and church-affiliated institutions, meanwhile, tend to be governed more like firms. The results overall are consistent with economic theories of political organization that view democratic governance primarily as a means of enhancing the credibility of commitments rather than as a method of aggregating preferences." Copyright 2006, The Author(s) Journal Compilation (c) 2006 Blackwell Publishing.
{"title":"Authority and Commitment: Why Universities, Like Legislatures, are Not Organized as Firms","authors":"S. Masten","doi":"10.1111/j.1530-9134.2006.00113.x","DOIUrl":"https://doi.org/10.1111/j.1530-9134.2006.00113.x","url":null,"abstract":"\"This paper explores the functions and limitations of democratic governance by analyzing the allocation of decision-making authority in colleges and universities. Contrary to the conventional perception that large numbers and heterogeneity of voters and issues undermine the efficiency of democratic decision making, data on the allocation of authority for thirty-one decision areas in 826 US colleges and universities show democratic governance to be more prevalent in larger, \"full-service\" research universities than in smaller liberal arts colleges and special-curriculum institutions. State- and church-affiliated institutions, meanwhile, tend to be governed more like firms. The results overall are consistent with economic theories of political organization that view democratic governance primarily as a means of enhancing the credibility of commitments rather than as a method of aggregating preferences.\" Copyright 2006, The Author(s) Journal Compilation (c) 2006 Blackwell Publishing.","PeriodicalId":248832,"journal":{"name":"Wiley-Blackwell: Journal of Economics & Management Strategy","volume":"23 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2005-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125199895","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2005-01-01DOI: 10.1111/j.1530-9134.2006.00111.x
Albert Banal-Estañol, M. Ottaviani
This paper studies the causes and the consequences of horizontal mergers among risk-averse firms. The amount of diversification depends on the allocation of shares among the merging firms, with a direct risk-sharing effect and an indirect strategic effect. If firms compete in quantities, consolidation makes firms more aggressive. Mergers involving few firms are then profitable with a relatively low level of risk aversion. With strong enough risk aversion, mergers reduce prices and improve social welfare. If firms instead compete in prices, consumers do not benefit from mergers in markets with demand uncertainty, but can easily benefit with cost uncertainty.
{"title":"Mergers with Product Market Risk","authors":"Albert Banal-Estañol, M. Ottaviani","doi":"10.1111/j.1530-9134.2006.00111.x","DOIUrl":"https://doi.org/10.1111/j.1530-9134.2006.00111.x","url":null,"abstract":"This paper studies the causes and the consequences of horizontal mergers among risk-averse firms. The amount of diversification depends on the allocation of shares among the merging firms, with a direct risk-sharing effect and an indirect strategic effect. If firms compete in quantities, consolidation makes firms more aggressive. Mergers involving few firms are then profitable with a relatively low level of risk aversion. With strong enough risk aversion, mergers reduce prices and improve social welfare. If firms instead compete in prices, consumers do not benefit from mergers in markets with demand uncertainty, but can easily benefit with cost uncertainty.","PeriodicalId":248832,"journal":{"name":"Wiley-Blackwell: Journal of Economics & Management Strategy","volume":"31 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2005-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117175458","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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