Product-Market Competition and Managerial Autonomy

It is often argued that competition forces managers to make better choices, thus favoring managerial autonomy in decision making. I formalize and challenge this idea. Suppose that managers care about keeping their position or avoiding interference, and that they can make strategic choices that affect both the expected profits of the firm and their riskiness. Even if competition at first pushes the manager towards profit maximization as commonly argued, I show that further increases in competitive forces might as well lead him to take excessive risks if the threat on his position is strong enough. To curb this possibility, the principal-owner optimally reduces the degree of autonomy granted to the manager. Hence higher levels of managerial autonomy are more likely for intermediate levels of competition.product-market competition, authority, decision making, delegation, autonomy

Does Competition Favor Delegation?

This paper studies the consequences of product-market competition on firms' decisions to delegate more or fewer decision-making responsibilities to managers. By simultaneously addressing the choice of both competitive actions and organizational design, the paper makes an attempt at bringing economic theory and management strategy closer together. An increase in substitutability between the products of the different firms triggers a different response depending on the size of the firm: larger firms delegate more responsibility, whereas smaller firms centralize decision making. The increase in substitutability also causes some firms to exit the market, which pushes in the direction of reduced managerial autonomy. Stronger competition also leads to less discretion in markets in which the possibilities for product differentiation are important. For a given number of firms, an increase in market size increases centralization, as the owner of the firm finds it more costly to accept rent seeking by the managers. However, this increase in market size will lead to the entry of more firms, which calls for more decentralized decision making. Under reasonable conditions, the aggregate effect leads to a U-shaped relationship where firms in both small and large markets are characterized by high levels of discretion, while there is less discretion for intermediate market sizes. Finally, a reduction in entry barriers leads unambiguously to an increase in the level of discretion given to the agent, as it results in a larger number of firms entering the market and, for a given market size, in lower concentration or expected firm-level demand, which reduces the value of having control and pushes in the direction of increased autonomy.product-market competition, delegation, authority, oligopoly, firm organization

Reducing the Asymmetry of Information Through the comparison of the Relative Efficiency of Several Regional Monopolies

Following the process initiated by Chile in the early 1980s, most countries in South America have undergone deep transformations in their electric industries. In this new playing field, the comparison of the relative efficiency of several regional monopolies seems to be a potentially valuable tool to reduce the asymmetry of information that is involved in the regulator-firm relationship. However, to be useful in the regulatory process, productive frontier estimates require a broad set of comparable firms and detailed information about them. This availability of data, although a necessary condition, is far from sufficient. One must also count on adequate techniques. In this paper we carry out an efficiency analysis in the electricity distribution sector in South America using different techniques, stating the conditions under which they become a useful tool in crafting an efficient regulation of the firms in that sector. Despite the particular results found here, the paper underscores the importance of conducting a consistency analysis whenever using efficiency measures in applied regulation.electric industries; efficiency; regional monopolies; asymmetry of information

Levels of asset specificity in relational contracting

Standard property rights theory (whether static or dynamic) assumes assets are specific, but once this assumption is in place, the level of asset specificity has no bearing on the make-or-buy decision. While there are good reasons to doubt the universality of transaction cost economics’ prediction that the more specific the asset, the more likely is vertical integration to be optimal, this is an issue that cannot be addressed within the existing property rights framework. In this paper the level of asset specificity matters for the integration decision, even in the static version of the model, and this result emerges naturally once an equally reasonable bargaining protocol is considered. To show this, we take Baker, Gibbons, and Murphy’s (2002) relational contracting model, and use it as the vehicle for the analysis. Changing the bargaining protocol assumed by those authors results in a model in which the integration choice is affected in a non-trivial way by realized asset specificity

Procurement in infrastructure : what does theory tell us ?

Infrastructure has particular challenges in public procurement, because it is highly complex and customized and often requires economic, political and social considerations from a long time horizon. To deliver public infrastructure services to citizens or taxpayers, there are a series of decisions that governments have to make. The paper provides a minimum package of important economic theories that could guide governments to wise decision-making at each stage. Theory suggests that in general it would be a good option to contract out infrastructure to the private sector under high-powered incentive mechanisms, such as fixed-price contracts. However, this holds under certain conditions. Theory also shows that ownership should be aligned with the ultimate responsibility for or objective of infrastructure provision. Public and private ownership have different advantages and can deal with different problems. It is also shown that it would be a better option to integrate more than one public task (for example, investment and operation) into the same ownership, whether public or private, if they exhibit positive externalities.Public Sector Economics&Finance,Debt Markets,Infrastructure Economics,Contract Law,Transport Economics Policy&Planning

Consistency Conditions: Efficiency Measures for the Electricity Distribution Sector in South America

The main goals of this paper are basically two: to compare the relative efficiency of the firms in the electricity distribution sector in South America, and to perform a consistency analysis on the different approaches usually used to measure efficiency. The estimated model considers a single output (customers) and six variables standing for inputs and environmental characteristics (service area, sales, market structure, mains kilometres of distribution, number of employees and transformer capacity). Information on these variables comes from the CIER database for the accounting year ending in 1994. This model is in line with the previous literature on the subject. It has been found that, in general, the consistency conditions are met.Consistency Conditions; Efficiency Measures; Electricity Distribution Sector

The case for international coordination of electricity regulation : evidence from the measurement of efficiency in South America

A decade long experience shows that monitoring the performance of public and private monopolies in South America is proving to be the hard part of the reform process. The operators who control most of the information needed for regulatory purposes have little interest in volunteering their dissemination unless they have an incentive to do so. The authors argue that, in spite of, and maybe because of, a much weaker information base and governance structure, South America's electricity sector could pursue an approach that relies on performance rankings based on comparative efficiency measures. The authors show that with the rather modest data currently available publicly, such an approach could yield useful results. They provide estimates of efficiency levels in South America's main distribution companies between 1994 and 2000. Moreover, the authors show how relatively simple tests can be used by regulators to check the robustness of their results and strengthen their position at regulatory hearings.Economic Theory&Research,Environmental Economics&Policies,Enterprise Development&Reform,Labor Policies,Health Monitoring&Evaluation,Environmental Economics&Policies,Economic Theory&Research,Geographical Information Systems,Health Monitoring&Evaluation,Educational Technology and Distance Education

Una Introducción a la Estimación No Paramétrica de Fronteras de Eficiencia

El interés en las fronteras de producción y la medición de la eficiencia relativa a estas fronteras ha crecido considerablemente en las últimas dos décadas y en los últimos años ha habido un rápido incremento en el número de trabajos publicados sobre el análisis de la eficiencia en la producción. El objetivo de este artículo es presentar una de las técnicas analíticas que, simultáneamente, caracteriza la estructura de una tecnología eficiente de producción (la frontera de producción) y mide la eficiencia en relación a dicha frontera. La técnica a la que hacemos mención es la programación matemática (lineal), la cual provee una medida de la eficiencia relativa a una frontera de producción no paramétrica. Aplicamos luego las técnicas de programación lineal a una muestra de empresas de distribución de electricidad para ilustrar el tipo de información que pueden generar.fronteras de producción; eficiencia relativa; producción no paramétrica; empresas de distribución de electricidad

Asset Specificity and Vertical Integration: Williamson’s Hypothesis Reconsidered

A point repeatedly stressed by transaction cost economics is that the more specific the asset, the more likely is vertical integration to be optimal. In spite of the profusion of empirical papers supporting this prediction, recent surveys and casual observation suggest that higher levels of asset specificity need not always lead to vertical integration. The purpose of this paper is to uncover some of the factors driving firms to (sometimes) choose to remain separated, rather than integrate, in the presence of high specificity. Its main economic message is that in a world where outside options matter and investments are multidimensional, high levels of asset specificity can foster nonintegration: a low level of specificity provides the most misdirected incentives when transacting in a market (because the outside option of external trade becomes so tempting), thus making a stronger case for nonintegration when specificity is high.relational contracts, asset specificity, property rights, vertical integration, outsourcing

Are cost models useful for telecoms regulators in developing countries?

Worldwide privatization of the telecommunications industry, and the introduction of competition in the sector, together with the ever-increasing rate of technological advance in telecommunications, raise new and critical challenges for regulation. Fo matters of pricing, universal service obligations, and the like, one question to be answered is this: What is the efficient cost of providing the service to a certain area or type of customer? As developing countries build up their capacity to regulate their privatized infrastructure monopolies, cost models are likely to prove increasingly important in answering this question. Cost models deliver a number of benefits to a regulator willing to apply them, but they also ask for something in advance: information. Without information, the question cannot be answered. The authors introduce cost models and establish their applicability when different degrees of information are available to the regulator. They do no by running a cost model with different sets of actual data form Argentina's second largest city, and comparing results. Reliable, detailed information is generally scarce in developing countries. The authors establish the minimum information requirements for a regulator implementing a cost proxy model approach, showing that this data constraint need not be that binding.ICT Policy and Strategies,Decentralization,Environmental Economics&Policies,Economic Theory&Research,Business Environment,ICT Policy and Strategies,Environmental Economics&Policies,Geographical Information Systems,Economic Theory&Research,Educational Technology and Distance Education