Organizational Design and Career Concerns

Daisuke Hirata (Hitotsubashi University)

Abstract : This paper studies organizational design as the allocation of decision rights, primarily focusing on its interplay with agents’ career motives. I identify a new tradeoff between delegation and centralization, which arises solely from career concerns: When delegated, an agent takes inefficient actions at the cost of a principal but also works harder ex post to implement his project, in order to manipulate the market expectations of his ability. Compared to the existing literature, the contribution of the paper is two-fold. First, it endogenizes the agent’s bias as a result of career concerns. Second, more importantly, it uncovers a new link between organizational design and the implementation of a decision. Both of these features are in sharp contrast to the vast majority of the existing studies, which takes the agent’s bias as given and abstracts away from the implementation stage of a decision process. Specifically, delegation can be strictly optimal in the present framework even if the agent has no information advantage over the principal. As an application, I extend the baseline model to a multi-task setting, and find an interaction effect between organizational design and job design. Specifically, delegation to a specialized agent can be optimal even when neither delegation without specialization nor specialization without delegation is beneficial.

Delegating Performance Evaluation

Igor Letina (University of Zurich)
Shuo Liu (University of Zurich)
Nick Netzer (University of Zurich)

Abstract : We study optimal incentive contracts with multiple agents when performance eval- uation is delegated to a reviewer. The reviewer may be biased in favor of the agents, but the degree of the bias is unknown to the principal. We show that a contest, which is a contract in which the principal determines a set of prizes to be allocated to the agents, is optimal. By using a contest, the principal can commit to sustaining incentives despite the reviewer’s potential leniency bias. The optimal effort profile can be uniquely implemented by a modified all-pay auction, and it can also be implemented by a nested Tullock contest. Our analysis has implications for applications as diverse as the design of worker compensation, the awarding of research grants, and the allocation of foreign aid.

Optimality of Straight Talk: Information Feedback and Learning

Kimiyuki Morita (Osaka University of Economics)

Abstract : This study examines the interaction between information feedback and learning in a principal-agent model. The agent implements a project, and its success probability depends on the agent’s ability level which is uncertain. While the principal cannot offer any monetary incentive, she has superior information about the agent’s ability level and can provide feedback. The key feature of the model is that the agent may develop his ability level after receiving feedback, but before the project’s implementation. If the principal observes bad news and tells it truthfully, then (i) it hurts the agent’s incentive to implement the project, but (ii) it induces the agent to develop his ability. I derive the condition under which the principal tells the bad news truthfully.

Division of Labor in Multi-business Firms: Human Capital, Job Design, and Labor Contracts

Birger Wernerfelt (MIT)

Abstract : We ask how division of labor is enhanced in multi-business firms. What human capital do the workers acquire, how are their jobs designed, and under what kinds of contracts do they work? To answer the questions in a way that is consistent with the existence of multi-business firms, we develop a simple model with endogenous human capital acquisition, job design, labor contracts, and firm size. We find conditions under which several different sets of human capital and job designs will be observed and characterize the mechanisms in which each is traded. The mechanisms used in equilibria include markets of different sizes, employment in single- and multi-business firms, and bilateral non-employment relationships. When they exist, multi-business firms allow workers to acquire human capital in, and work on, a narrow set of services, and they can therefore use dedicated employees to perform services that smaller firms buy in the market or get from employees with broader job descriptions. The theory of multi-business firms extends to factors of production other than labor and implies that firms diversify to leverage excess capacity of inputs that, because of sub-additive transactions-costs, cannot be traded in fractions or rented for short periods. As a test of this, we look at a sample of acquisitions and show that acquirers change the behavior of their targets to more closely resemble themselves.