We analyze an oligopolistic competition with differentiated products and qualities. The quality of a product is not known to consumers. Each firm can make an imperfect disclosure of its product quality before engaging in price-signaling competition. There are two regimes for separating equilibrium in our model depending on the parameters. Our analysis reveals that, in one of the separating regimes, price signaling leads to intense price competition between the firms under which not only the high-quality firm but also the low-quality firm chooses to disclose its product quality to soften the price competition.
Integrating planning and implementation, by having one agent perform both tasks, may be effective in encouraging planning activity whose outcome is not observable. Emphasizing its information-generating role, we find that planning activity is best encouraged by partially integrating the tasks. This is because the value of information is nonmonotonic in the degree of task integration. Therefore, the threat of using a second agent to implement the project may relax the moral hazard constraint associated with the planning task. The project size is distorted to increase the value of information, and there can be overinvestment relative to the first best.
We explain why organizations that limit the voice of their agents can benefit from granting them an exit option. We study a hierarchy with a principal, a productive supervisor and an agent.Communication is imperfect in that only the supervisor can communicate with the principal, while the agent has no direct voice to the principal. We show that the principal is better off if she grants the agent the option to walk away from the contract. By doing so, the principal is implicitly giving a "veto" power to the agent. This, in turn, restricts the manipulation of report by the supervisor. Thus, the exit option can be interpreted as a remedy for limits on communication.Our finding contrasts to the traditional result from the contract theory literature that the exit option reduces the principal's welfare, while protecting the agent. Our result is robust to the case of collusion between the supervisor and the agent. We also examine the optimal exit option, i.e., whether exit should entail a payment to or from the agent.JEL Classification: D82, L22
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