Optimal Contracting with Costly State Verification, with an Application to Crowdsourcing

Aislinn Bohren (University of Pennsylvania)
Troy Kravitz (Federal Deposit Insurance Corporation)

Abstract : A firm employs workers to obtain costly unverifiable information -- for example, categorizing the content of images. Workers are monitored by comparing their messages. The optimal contract under limited liability exhibits three key features: (i) the monitoring technology depends crucially on the commitment power of the firm -- virtual monitoring, or monitoring with arbitrarily small probability, is optimal when the firm can commit to truthfully reveal messages from other workers, while monitoring with strictly positive probability is optimal when the firm can hide messages (partial commitment), (ii) bundling multiple tasks reduces worker rents and monitoring inefficiencies; and (iii) the optimal contract is approximately efficient under full but not partial commitment. We conclude with an application to crowdsourcing platforms, and characterize the optimal contract for tasks found on these platforms.

Product Market Competition, Managerial Talent, and Innovation

Jean-Etienne de Bettignies (Queen's University)
John Ries (University of British Columbia)

Abstract : We examine the relationship between product market competition and innovation in an agency model where risk-neutral, wealth-constrained, effort exerting managers a) are heterogeneous in talent, and b) can choose the industry in which to work. We show that when managerial talent information is known to employers but effort is not contractible, innovation increases with competition, as more talented managers self-select into more competitive industries, where their ability to extract rents is highest. In contrast, when talent information is not available to employers, talented managers may try and signal their type by selecting moderately competitive industries to avoid "imitation" by less talented managers.

Vertical Boundaries and the Influence of Social Comparison

Michael Kopel (University of Graz)
Anna Ressi (University of Graz)

Abstract : We study how inter-firm social comparison can alter the choice of two competing manufacturers between vertical integration and vertical separation to independent, status-concerned retailers. Status is determined by the difference in retailers’ market shares. The novelty of our paper is that in line with empirical evidence, the intensity of social comparison (i) depends on the distance between retail outlets, and (ii) can be influenced by the manufacturer by adjusting the outlet’s location. In contrast to the commonly studied case of a distance-independent intensity of status concern, social comparison with a distance-dependent intensity of status concern predicts different optimal firm boundaries.

Do Multinationals Transplant Their Business Model?

Dalia Marin (LMU Munich)
Linda Rousova (European Central Bank)
Thierry Verdier (Paris School of Economics)

Abstract : What determines whether or not multinational firms transplant the mode of organisation to other countries? We embed the theory of knowledge hierarchies in an industry equilibrium model of monopolistic competition to examine how the economic environment may affect the decision of multinational firms about transplanting the business organisation to other countries. We test the theory with original and matched parent and affiliate data on the internal organisation of 660 Austrian and German multinational firms and 2200 of their affiliate firms in Eastern Europe. We find that three factors stand out in promoting the multinational firm’s decision to transplant the business model to the affiliate firm in the host country: a competitive host market, the corporate culture of the multinational firm, and when an innovative technology is transferred to the host country. These factors increase the respective probabilities of organisational transfer by 9 percentage points, 18, and 27 percentage points.