Hierarchical Decentralization of Incentive Contracts

Melumad, Nahum D.; Mookherjee, Dilip; Reichelstein, Stefan

doi:10.2307/2556011

Cited by 183 publications

(107 citation statements)

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“…We are aware that in the complete contracting literature, there is research comparing the efficiency of contracts under three kinds of organizational structures: separation, integration and nested departments (Baron and Besanko 1992;Melumad et al 1995;Mookherjee and Tsumagari 2004;Severinov 2008). It should be noted that "separation" in the complete and incomplete contract situations has the same meaning, but the "integration" in this paper is more akin to the "nested departments" or "subcontracting" in the complete contract settings.…”

Section: Discussionmentioning

confidence: 96%

Incomplete contract, bargaining and optimal divisional structure

Bao

Wang

2011

J. Econ.

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When complete contracting is not possible, allocating control structure becomes the second-best arrangement. This paper analyzes the design of optimal divisional structure within an organization where ex post bargaining between the potential divisional managers is possible. In much the same light as Aghion and Tirole (J Political Econ 105(1):1-29, 1997), we study the control problem in the context of search for projects. Our model shows that when the managers cannot bargain with one another, internal integration is preferred to internal separation. Where bargaining is possible, formal divisional structure defines both the ex post bargaining position of the two managers and their incentive to search ex ante. When the managers tend to arrive at a more favorable project to the principal via bargaining, the general leader of a firm may want to choose separation instead to increase the probability of bargaining, as the symmetrical incentive requires both managers to search and get informed.

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Section: Discussionmentioning

confidence: 96%

Incomplete contract, bargaining and optimal divisional structure

Bao

Wang

2011

J. Econ.

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“…In this line, when Dana Jr. [3] concludes that regulators must centralize production when costs are sufficiently correlated, he writes " ... the break-up of electric utilities along distribution, transmission, and generation lines would be inconsistent with the theory." This paper 9 When ,10 1 ~ (2 -y/I -y) ,1IP both contracts are equally costly but the principal prefers to decentralize since it gives him a larger margin of choice: under decentralization contracts must satisfy q HL ~ q HH, whereas under centralization the only allocations which can be implemented are those for which q HL = q HH' 10 The interested reader will also find there an example for the continuous case for which decentralization is the optimal regulator'S choice. The crucial feature of that example is that the distribution function of OI(FI((JI)) stochastically dominates the distribution function of IP (F 2 (1P)).…”

Section: Discussionmentioning

confidence: 99%

A Note on the Optimal Structure of Production

Rocha¹,

Frutos²

1999

Journal of Economic Theory

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We analyze the advantages of centralization and decentralization in industries in which production takes place in several stages and the costs are privately observed by the agents in charge of production. We demonstrate that "informational diseconomies" arise when uncorrelated information is concentrated in the hands of a single agent. These diseconomies arise when the stages of production are different activities with different cost supports. Journal of Economic Literature Classification Numbers: D82, L22, L51.

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“…The severity of agency problems, in turn, may itself be endogenous and depends crucially on the organizational features of institutions (see, for example, Aghion and Tirole, 1997). 2 In analyzing the extent of agency problems generated by various organizational forms, I also benefit from previous work such as Melumad, Mookherjee, and Reichelstein (1995) and Macho-Stadler and Perez-Castrillo (1998). Finally, this paper benefits from the literature on the effects of financial imperfections on real economic activity.…”

Section: Related Literaturementioning

confidence: 98%

Organization of innovation and capital markets

Orman

2015

The North American Journal of Economics and Finance

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There has been an explosion of innovation backed by venture capital since late 1970's.Nonetheless, a great deal of innovation still occurs within large companies. In this paper, I investigate the factors that determine when innovation is performed by venture-backed firms and when by large companies. To this end, I develop a theoretical model in which development of new technologies and products requires the collaboration of researchers, executives, and suppliers of capital. I focus on the two-tier agency problem designed to provide simultaneously the right kinds of incentives for researchers and executives. I find that if capital markets function perfectly, it is optimal for innovation to be conducted by venture-backed firms: Specialization implicit in venture form of organization mitigates two-tier agency problems. If capital markets are sufficiently imperfect, however, it is optimal for innovation to be performed by large companies: they can use cheaper internal funds to finance innovation. I finally point to the role of policy in improving capital markets and hence innovation performance.JEL Classification: D2, D82, D86, G24, O32

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Hierarchical Decentralization of Incentive Contracts

Cited by 183 publications

References 20 publications

Incomplete contract, bargaining and optimal divisional structure

Incomplete contract, bargaining and optimal divisional structure

A Note on the Optimal Structure of Production

Organization of innovation and capital markets

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