Organizational structure and the hold-up problem

In this note, I consider a setting in which an agent can exert costly unobservable effort towards two activities and is, a priori, uncertain about its ability to perform them. A (non-contractible) ability enhancing investment can be performed. The lack of commitment from a Principal concerned with (informational) rent extraction, and who is in control of both activities, induces the standard underinvestment outcome of Hold-Up problems. It is then shown that, if the two activities are assigned to two different Principals, ex-post incentives will be more powerful generating, from an ex-ante perspective, higher incentives for ability enhancing investment. The combination of higher ex-ante investments and expost incentives produces an outcome that is superior than a single Principal’s outcome in terms of efficiency. This suggests that organizational structure, through its influence on the design of incentives over contractible variables, can play a key role is solving Hold-Up problems.

Corporate Board Structure, Managerial self-Dealing, and Common Agency

Corporate Boards usually come in two different shapes: unitary and dual. In the former, a single board/principal is responsible for monitoring and establishing performance targets; in the latter, these tasks are split between two boards/principals. This paper compares these two arrangements in terms of corporate performance and managerial self-dealing for a situation in which the CEO has private information. The equilibrium set of the common agency game induced by the dual board structure is fully characterized. Compared to a single board, a dual board demands less aggressive performance targets from the CEO, but exerts more monitoring. An unambiguous consequence of the first feature is that the CEO always exerts less effort toward production with a dual board. Due to the reduction in performance targets, the effect of a dual board on CEO’s self-dealing is ambiguous: there are equilibria in which, in spite of the increase in monitoring, self-dealing is higher in a dual system..