Essays on organisations and their internal conflicts

Defence date: 11 December 2023Examining Board: Prof. Giacomo Calzolari (European University Institute, supervisor); Prof. Thomas Crossley (University of Michigan, co-supervisor); Prof. Roland Strausz (Humboldt-Universität of Berlin); Prof. Konrad Stahl (University of Mannheim)This thesis is composed of three essays; each broadly related to conflicts of interests within organisations. First, “Internal Arbitrage: An Application to Multinational Enterprises”, studies the conflict of interest between a multinational enterprise (MNE) and its joint venture partners who are privately informed about local market conditions. MNEs can exploit the segmentation between national markets through internal arbitrage by using internal capital movements to lower profits in one country to raise them in another. This is generally not in the best interest of the outside investors who, given sufficient authority, prevent internal arbitrage. The MNE’s problem thus consists of truthfully eliciting the private information of its co-investors without delegating authority. Second, “The Dark(er) Side of Full Surplus Extraction” considers a principal contracting with one agent who possesses some relevant, private information in the canonical adverse selection model with general quasi-linear preferences and type-dependent reservation utilities. I derive the necessary and sufficient condition for full surplus extraction (FSE). FSE occurs when the principal can design an incentive-compatible mechanism in which the privately informed agent earns no information rents. Differently from previous FSE results known in the literature, I show that FSE can be efficiency decreasing. At times, the FSE mechanism is optimal for the principal even though the best nonFSE mechanism implies a higher total surplus. Finally, “Private Benefits of Influence”, considers a conflict of interest between different shareholders in a widely-held firm led by a professional manager. Empirical evidence suggests that large shareholders – so called blockholders – earn excess returns per share, i.e. private benefits. But without control, the blockholder must incentivise the manager to extract private benefits on her behalf. She does this by either imposing low powered incentives or by paying the manager a compensation premium. The blockholder can potentially rely on dynamic incentive provision to achieve her goals. This embeds the problem in the dynamic relationship between the blockholder and the manager. I show that this shaped by the blockholder’s investment strategy: a blockholder with a passive investment strategy – e.g. an index tracker – finds it easier to extract private benefits than a blockholder who can invest and divest at will. Dynamically, a passive investment strategy functions as a valuable commitment device to stay invested in the firm.-- 1. Internal Arbitrage: An Application to Multinational Enterprises -- 2. The Dark(er) Side of Full Surplus Extraction -- 3. Private Benefits of Influence -- Appendix A Chapter 1 -- Appendix B Chapter 2 -- Appendix C Chapter