Incomplete contract, bargaining and optimal divisional structure

Abstract

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.

Optimal Task Design for Intrinsically Motivated Workers with an Incomplete Contract

“…The main results presented herein are that when intrinsic motivation is high and screening ability is low, a firm manager might choose separation, in contrast to results reported by Bao and Wang (2012). The higher a worker's intrinsic motivation is, the higher the probability of choosing the firm management's favorite project becomes.…”

“…Consequently, although intrinsic motivation increases the firm's profit, it decreases the worker's effort incentive to search. Integration presents the important benefit of inducing maximum effort, as described by Bao and Wang (2012), but such a benefit might be lost in our model.…”

“…The agent having authority can choose a favorite one if both agents have information. Bao and Wang (2012) particularly demonstrate that integration is always chosen without bargaining between agents because workers exert maximum effort to seek out the project's information to implement a favorite one in two divisions.…”

“…Our model is based on that announced by Bao and Wang (2012), who study the control problem in the context of a search for projects. The firm management must decide on the allocation of control of two divisions to two workers.…”

“…Our model is based on that reported by Bao and Wang (Journal of Economics 107 81-96, 2012), where optimal organization structure is discussed. Bao and Wang (2012) report that, because workers exert maximum effort to discover a project's information to implement their favorite project, firms invariably choose integration without bargaining. The main result of this paper is the observation that when intrinsic motivation is sufficiently high, the firm might choose separation, in contrast to results reported by Bao and Wang.…”