Managerial Compensations and Information Sharing under Moral Hazard: Is Transparency Good?

We study the effects of information sharing on optimal contracting in a vertical hierarchies model with moral hazard and effort externalities. The paper has three main objectives. First, we determine and compare the equilibrium contracts with and without communication. We identify how each principal relates her agent’s wage to the opponent’s performance when they share information about agents’ performances. It turns out that the type of effort externalities across organizations is the main determinant of the responsiveness of each agent’s reward to the opponent’s performance. Second, in order to throw novel light on the emergence of information sharing agreements, we characterize the equilibria of a non- cooperative game where principals first decide whether to share information and then offer contracts to their exclusive agents. We explore the implications of introducing certification costs and show that three types of equilibria may emerge depending on the nature and (relative) strength of effort externalities: principals bilaterally share information if agents’ effort choices exhibit strong complementarity; only the principal with stronger monitoring power discloses information in equilibrium for intermediate levels of effort’s complementarity; principals do not share information if efforts are substitutes and for low values of effort’s complementarity. Moreover, differently from the common agency framework studied in Maier and Ottaviani (2009), in our model a prisoner’s dilemma may occur when efforts are substitutes and certification costs are negligible: if a higher effort by one agent reduces the opponent’s marginal productivity of effort the equilibrium involves no communication although principals would jointly be better off by sharing information. Finally, the model also offers novel testable predictions on the impact of competition on the basic trade-off between risk and incentives, the effects of organizations’ asymmetries on information disclosure policies as well as on the link between corporate control and the power of incentives.Competing Hierarchies, Information Sharing, Moral Hazard

Communicating Vertical Hierarchies: the Adverse Selection Case

I study the rationale for information sharing in a model where two principals, which exert production externalities one on another, endogenously decide whether to exchange information about their exclusive agents. I show that one novel effect shapes communication decisions when agents are privately informed about production costs. This effect is absent under complete information and it turns out to be of first-order magnitude relative to those emerging in such benchmark. Roughly, what matters is how sharing information impacts contracting relationships within opponent organizations, and therefore its effect on equilibrium outputs. Information exchange induces strategies to be correlated via the distortions channel. Because of those distortions, the equilibrium value of communication depends on the interplay between the nature of upstream externalities and the sign of cost correlation. When upstream externalities and cost correlation have the same sign, there exists a unique symmetric equilibrium with no communication. By contrast, when upstream externalities and cost correlation have opposite signs there exists a unique symmetric equilibrium where both principals share information. I also show that, unlike in previous models, under asymmetric information principals might run into a prisoner dilemma when there is no communication at equilibrium. Information sharing is also shown to have an unambiguous negative effect on rents. Moreover, there exists a system of transfers such that the equilibrium outcome obtained when both principals share information is collusion-proof.Adverse selection, communication, information sharing, vertical hierarchies

The fundamental problem of command : plan and compliance in a partially centralised economy

When a principal gives an order to an agent and advances resources for its implementation, the temptations for the agent to shirk or steal from the principal rather than comply constitute the fundamental problem of command. Historically, partially centralised command economies enforced compliance in various ways, assisted by nesting the fundamental problem of exchange within that of command. The Soviet economy provides some relevant data. The Soviet command system combined several enforcement mechanisms in an equilibrium that shifted as agents learned and each mechanism's comparative costs and benefits changed. When the conditions for an equilibrium disappeared, the system collapsed.Comparative Economic Studies (2005) 47, 296–314. doi:10.1057/palgrave.ces.810011

A Note on the Value of Residual Claimancy with Competing Vertical Hierarchies

In this short paper we study a competing vertical hierarchies model where the allocation of residual claimancy is endogenous and is determined jointly with production and contractual decisions. We find a set of circumstances in which the (equilibrium) allocation of residual claimancy is affected by competition in a non trivial manner. More precisely, although revenue-sharing contracts foster agents. (non-contractible) surplus enhancing effort, we show that competing principals dealing with exclusive and privately informed agents might still prefer to retain a share of the surplus from production when dealing with inefficient types. This is because reducing the surplus share of inefficient types reduces the information rent given up to efficient types. Hence, the equilibrium allocation of residual claimancy follows a pro-cyclical rule.Adverse selection, residual claimancy, vertical hierarchies

Hybrid Modes of Organization. Alliances, Joint Ventures, Networks, and Other 'Strange' Animals

The central message conveyed in this chapter is that there is a whole class of economic organizations that contribute substantially to what Coase (1992) called "the institutional structure of production". These arrangements fall neither under pure market relationships nor within 'firm boundaries'. They have multiplied because they are viewed as efficient in dealing with knowledge-based activities, solving hold-up problems, and reducing contractual hazards. They have properties of their own that deserve theoretical attention and empirical investigation.Hybrids, Alliances, Joint Ventures, organization theory, transaction costs, incomplete contracts

Simplistic vs. Complex Organization: Markets, Hierarchies, and Networks in an 'Organizational Triangle'

Transaction cost economics explains organizations in a simplistic ‘market-vs.-hierarchy’ dichotomy. In this view, complex real-world coordination forms are simply considered ‘hybrids’ of those ‘pure’ and ideal forms, thus being located on a one-dimensional ‘line’ between them. This ‘organizational dichotomy’ is mainly based on relative marginal transaction costs, relative lengths of value-added chains, and ‘rational choice’ of coordination form. The present paper, in contrast, argues that pure ‘market’ and ‘hierarchy’, even including their potential hybrids, are a theoretically untenable and empirically void set. Coordination forms, it is argued, have to be conceptualized in a fundamentally different way. A relevant ‘organizational space’ must reflect the dimensions of a complex world such as dilemma-prone direct interdependence, resulting in strong strategic uncertainty, mutual externalities, collectivities, and subsequent emergent process. This, in turn, will lead either to (1) informally institutionalized, problem-solving cooperation (the instrumental dimension of the institution) or (2) mutual blockage, lock-in on an inferior path, or power- and status-based market and hierarchy failure (the ceremonial dimension of the institution). This paper establishes emergent instrumental institutionalized cooperation as a genuine organizational dimension which generates a third ‘attractor’ besides ‘market’ and ‘hierarchy’, i.e., informal network. In this way, an ‘organizational triangle’ can be generated which may serve as a more relevant heuristic device for empirical organizational research. Its ideal corners and some ideal hybrids on its edges (such as ideal clusters and ideal hub&spoke networks) still remain empirically void, but its inner space becomes empirically relevant and accessible. The ‘Organizational Triangle’ is tentatively applied (besides casual reference to corporate behavior that has lead to the current financial meltdown), by way of a set of criteria for instrumental problem-solving and a simple formal algorithm, to the cases of the supplier network of ‘DaimlerChrysler US International’ at Tuscaloosa, AL, the open-source network Linux, and the web-platforms Wikipedia and ‘Open-Source Car’. It is considered to properly reflect what is generally theorized in evolutionary-institutional economics of organizations and the firm and might offer some insight for the coming industrial reconstructions of the car and other industries.Market vs. Hierarchy; Transaction Costs; Complexity; Institutionalization; Network Formation; Hub&Spoke Supplier Networks; Open-Source Networks

"Strange forms" : Still in need for a framework.

Planification stratégique; Coût de transaction;

Networks in the shadow of markets and hierarchies : calling the shots in the visual effects industry

The nature and organisation of creative industries and creative work has increasingly been at the centre of academic and policy debates in recent years. The differentiation of this field, economically and spatially, has been tied to more general arguments about the trend towards new trust-based, network forms of organization and economic coordination. In the first part of this paper, we set out, unpack and then critique the conceptual and empirical foundations of such claims. In the main section of the paper, we draw on research into a particular creative sector of the economy - the visual effects component of the film industry - a relatively new though increasingly important global production network. By focusing both on firms and their workers, and drawing on concepts derived from global value chain, labour process and institutional analysis, we aim to offer a more realistic and grounded analysis of creative work within creative industries. The analysis begins with an attempt to explain the power dynamics and patterns of competition and collaboration in inter-firm relations within the Hollywood studio-dominated value chain, before moving to a detailed examination of how the organisation of work and reemployment relations are central to the capturing of value. On the basis of that evidence, we conclude that trust-based networks and collaborative communities play some part in accessing and acquiring leverage in the value chain, but do not explain the core mechanisms of resource allocation, coordination and work organisation