The Timing of Entry into New Markets

Under what circumstances will a successful incumbent in a related market be the first to enter a new market? We present a model in which the order of entry into new markets has long run effects on the firms' profits. We assume that a firm that is successfully producing in a related market has valuable information about the demand in the new market. By his choice of location in product space in the new market the incumbent reveals information about the demand to the potential entrant. Thus, the incumbent would like to enter after the newcomer in order to prevent the rival from free riding on his proprietary information; however, the rival would also like to enter second so that he can benefit from the other's information. When both firms want to enter last, the order of entry is modeled as a timing game in continuous time. Using a refinement of Nash equilibrium known as "risk-dominance" we show that when the informational advantage of the incumbent is very great, his implicit threat to wait out his rival is less powerful than the equivalent threat by the potential entrant, and the incumbent will enter first. On the other hand, the incumbent's lower incentive to enter the new market due to the "cannibalization" effect of entering a related market is a weapon that the incumbent can use to "force" the rival to enter first, in equilibrium. We also find that incumbent entrants into new markets are more likely to succeed in the new market, in equilibrium, than are newcomers, regardless of order of entry. On the other hand, looking cross sectionally across markets, incumbents are more likely to succeed when they are early rather than late entrants, but newcomers are more likely to succeed when they are late entrants than early.

Bonuses and Penalties as Equilibrium Incentive Devices, with Application to Manufacturing Systems

Although psychologists view bonuses and penalties as very different means of providing incentives for workers, economists have had less success at making sense of the distinction. A rational worker should be indifferent as to whether a payment scheme is called a bonus or a penalty plan if the actual contingent pay stream is identical in the two cases. In this paper we provide a framework for understanding the difference between payment plans that are deemed to be penalty or bonus schemes, and derive implications for when such plans should be implemented as a function of observable features of the manufacturing and monitoring systems. We call a payment plan a "bonus" scheme if the high payment occurs infrequently in equilibrium; a payment scheme entails a possible "penalty" if the low wage occurs infrequently. The frequency of high and low payments is derived in equilibrium in a model with moral hazard and probabilistic monitoring. We focus on the role of commitment and the possibility of false positives in he monitoring technology. It is shown that when the firm can commit to a monitoring intensity the workers will (almost) always be diligent and a penalty scheme will be observed. When commitment is infeasible the optimal payment structure depends on whether the monitoring technology permits false positives. In the absence of false positives the workers will be observed to face a penalty scheme if found shirking, but when false positives are possible there will be considerable shirking by workers in equilibrium, and a bonus scheme will be observed. We then analyze the crucial features of our theoretical monitoring technology in he context of actual employment situations. We find that middle-management and other non-production jobs are appropriate for bonus-type incentives, whereas in unskilled jobs or aspects of highly skilled jobs that require diligence but not skill, such as arriving on the job on time, we predict penalty incentives. We argue that the observed scarcity of penalty-type schemes can be explained by our model, without resorting to psychological justifications. In addition, we interpret the Japanese manufacturing systems as having a particular, built-in monitoring system that can be analyzed in our framework and shown to implement a high level of diligence from factory workers.

Using the Capital Market as a Monitor: Corporate Spinoffs in an Agency Framework

A model is developed in which corporate spinoffs are a feature of incentive contracts for product managers in diversified firms. I argue that the possibility of a future spinoff can improve current incentives for divisional managers, even if a spinoff rarely actually occurs. Spinoff incentive policies exploit the fact that after a spinoff, the stock value of the product line is a much cleaner signal of managerial productivity than when the division belongs to the parent firm. I show that providing current incentives through such a reorganization policy can dominate standard principal-agent contracts in highly diversified firms. Empirical implications of the model are developed regarding corporate spinoff behavior and the compensation of divisional managers.

Worker Reputation and Productivity Incentives.

This paper examines firms' problems of how to motivate risk-averse workers not to shirk whe n workers' utility functions are unknown. The problem is studied in a two-period setting in which a worker's actions today can influence n ot only his compensation today but the firms' beliefs about his prefe rences. Firms cannot credibly commit to ignore the revealed informati on, so workers' actions today affect their future compensation contra cts. It is shown that, in the Wilson-Miyazaki equilibrium, firms may pool workers and learn about their types gradually over time rather t han inducing them to separate and reveal their types immediately. Copyright 1987 by University of Chicago Press.

Ability, Moral Hazard, Firm Size, and Diversification

I develop a model of firm diversification into multiple product lines that is based on the agency problem between the firm's managers and owners. The agency relationship, together with a span-of-control managerial technology, determines an optimal firm size and degree of diversification that are increasing in the manager's ability and therefore positively correlated cross sectionally. I compare the benefits of merger with those achieved by using compensation contracts based on relative performance and show that, for a particular parameterization, the relative value of merger is a nonmonotonic function of the correlation between the productivity signals of the two firms.