Investments and the Holdup Problem in a Matching Market

This paper studies investment incentives in the steady state of a dynamic bilateral matching market. Because of search frictions, both parties in a match are partially locked–in when they bargain over the joint surplus from their sunk investments. The associated holdup problem depends on market conditions and is more important for the long side of the market. In the case of investments in homogenous capital only the agents on the short side acquire ownership of capital. There is always underinvestment on both sides of the market. But when market frictions become negligible, the equilibrium investment levels tend towards the ?rst–best

Externalities, Communication and the Allocation of Decision Rights

This paper views authority as the right to undertake decisions that impose externalities on other members of the organization. When only decision rights can be contractually assigned to one of the organization’s stakeholders, the optimal assignment minimizes the resulting inefficiencies by giving control rights to the party with the highest stake in the organization’s decisions. Under asymmetric information, the efficient allocation of authority depends on the communication of private information. In the case of multiple decision areas, divided control rights may enhance organizational efficiency unless there exist complementarities between different decisions

Externalities and the Allocation of Decision Rights in the Theory of the Firm

This paper views authority as the right to undertake decisions that have external effects on other members of the organization. Because of contractual incompleteness, monetary incentives are insufficient to internalize these effects in the decision maker’s objective. The optimal assignment of decision rights minimizes the resulting inefficiencies. We illustrate this in a principal–agent model where the principal retains the authority to select ‘large’ projects but delegates the decision right to the agent to implement ‘small’ projects. Extensions of the model discuss the role of effort incentives, asymmetric information and multistage decisions

Externalities and the Allocation of Decision Rights in the Theory of the Firm

This paper views authority as the right to undertake decisions that have external effects on other members of the organization. Because of contractual incompleteness, monetary incentives are insufficient to internalize these effects in the decision maker’s objective. The optimal assignment of decision rights minimizes the resulting inefficiencies. We illustrate this in a principal–agent model where the principal retains the authority to select ‘large’ projects but delegates the decision right to the agent to implement ‘small’ projects. Extensions of the model discuss the role of effort incentives, asymmetric information and multistage decisions.Authority; Control Rights; Decision Rights; Delegation; Externalities; Incomplete Contracts; Theory of the Firm

Investments and the Holdup Problem in a Matching Market

This paper studies investment incentives in the steady state of a dynamic bilateral matching market. Because of search frictions, both parties in a match are partially locked–in when they bargain over the joint surplus from their sunk investments. The associated holdup problem depends on market conditions and is more important for the long side of the market. In the case of investments in homogenous capital only the agents on the short side acquire ownership of capital. There is always underinvestment on both sides of the market. But when market frictions become negligible, the equilibrium investment levels tend towards the ?rst–best.Holdup Problem; Matching Market; Investments

Externalities, communication and the allocation of decision rights

This paper views authority as the right to undertake decisions that impose externalities on other members of the organization. When only decision rights can be contractually assigned to one of the organization's stakeholders, the optimal assignment minimizes the resulting inefficiencies by giving control rights to the party with the highest stake in the organization's decisions. Under asymmetric information, the efficient allocation of authority depends on the communication of private information. In the case of multiple decision areas, divided control rights may enhance organizational efficiency unless there exist complementarities between different decisions. --Authority,Decision Rights,Externalities,Incomplete Contracts,Imperfect Information,Theory of the Firm

Investments and the holdup problem in a matching market

This paper studies investment incentives in the steady state of a dynamic bilateral matching market. Because of search frictions, both parties in a match are partially locked-in when they bargain over the joint surplus from their sunk investments. The associated holdup problem depends on market conditions and is more important for the long side of the market. In the case of investments in homogenous capital only the agents on the short side acquire ownership of capital. There is always underinvestment on both sides of the market. But when market frictions become negligible, the equilibrium investment levels tend towards the first-best. --Holdup Problem,Matching Market,Investments

Exit Options and the Allocation of Authority

We analyze the optimal allocation of authority in an organization whose members have conflicting preferences. One party has decision-relevant private information, and the party who obtains authority decides in a self-interested way. As a novel element in the literature on decision rights, we consider exit option contracts: the party without decision rights is entitled to prematurely terminate the relation after the other party's choice. We show that under such a contract it is always optimal to assign authority to the informed and not to the uninformed party, irrespective of the parties' conflict of interest. Indeed, the first-best efficient solution can be obtained by such a contract

Conflict and the Social Contract

We consider social contracts for resolving conflicts between two agents who are uncertain about each other's fighting potential. Applications include international conflict, litigation, and elections. Even though only a peaceful agreement avoids a loss of resources, if this loss is small enough, then any contract must assign a positive probability of conflict. We show how the likelihood of conflict outbreak depends on the distribution of power between the agents and their information about each other

Exit Options in Incomplete Contracts with Asymmetric Information

This paper analyzes bilateral contracting in an environment with contractual incompleteness and asymmetric information. One party (the seller) makes an unverifiable quality choice and the other party (the buyer) has private information about its valuation. A simple exit option contract, which allows the buyer to refuse trade, achieves the first–best in the benchmark cases where either quality is verifiable or the buyer’s valuation is public information. But, when unverifiable and asymmetric information are combined, exit options induce inefficient pooling and lead to a particularly simplecontract. Inefficient pooling is unavoidable also under the most general form of contracts, which make trade conditional on the exchange of messages between the parties. Indeed, simple exit option contracts are optimal if random mechanisms are ruled out