An Incomplete Contract Approach to Authority in Organizations for Choice and Execution

Akifumi Ishihara (National Graduate Institute for Policy Studies)
Shintaro Miura (Kanagawa University)

Abstract : We consider an incomplete contracting model with a principal and an agent, in which the decision process consists of project choice and execution effort, and investigate the optimal allocation of authority for project choice. Each party has an imperfectly informative private signal on which project is promising, and the project is successfully executed if and only if the promising project is chosen and the agent exerts effort to execute the project. Since the principal chooses the project based on her private signal when she has the authority (centralization), the agent's confidence on the promising project has more uncertainty than the agent has the authority (delegation). Consequently, it might be optimal to allocate authority to the party who has less precise information on the promising project. Furthermore, we demonstrate that whether contractible delegation and empowerment could have a nonnegligible gap even though the parties have no conflict on the desired project.

Communication and Decision Making in Heterogeneous Partnerships

Behrang Manouchehrabadi (Erasmus University)
George Hendrikse (Erasmus University)

Abstract : We investigate the effects of member heterogeneity on communication and decision making in partnerships. We show that member heterogeneity makes communication noisy in a partnership and this in turn alters the optimal allocation of decision rights in the partnership. In addition, the effect of heterogeneity also depends on the market in which the partnership operates. Finally, it is shown that repeated interactions alleviates the communication problem resulting from heterogeneity.

Hypothetical Thinking and the Winner's Curse: an Experimental Investigation

Johannes Moser (University of Regensburg)

Abstract : There is evidence that bidders fall prey to the winner's curse because they fail to extract information from hypothetical events - like winning an auction. This paper investigates experimentally whether bidders in a common value auction perform better when the requirements for this cognitive issue - also denoted by contingent reasoning - are relaxed, leaving all other parameters unchanged. The overall pattern of the data suggests that the problem of irrational over- and underbidding can be weakened by giving the subjects ex ante feedback about their bid, but unlike related studies I also find negative effects of additional information.