Delegating management to experts

Dai, Chifeng; Lewis, Tracy R.; Lopomo, Giuseppe

doi:10.1111/j.1756-2171.2006.tb00028.x

Cited by 33 publications

(36 citation statements)

References 29 publications

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“…(7.22) Furthermore, the optimal choice cutoff r * A should be such that having found a price r * A , the expected reduction in commodity price from a second search by the agent must exactly balance the increase in wages that this search entails, or 23) which implies that:…”

Section: Discussionmentioning

confidence: 99%

Electronic Markets, Search Costs and Firm Boundaries

Shankar

Sundararajan

2005

SSRN Journal

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Abstract. We study how electronic markets that facilitate broader inter-firm transactions affect the vertical scope of emerging IT-enabled extended enterprises. We do so by modeling firms in a three-tier value chain who are each connected to a common electronic market that facilitates direct business transactions across tiers, and that lowers the search costs associated with finding an appropriate trading partner for each of them. The extent to which search costs are reduced depends on the complexity of B2B search, and the nature of the supporting technologies that the electronic market facilitates. Variation in search costs affect firms across the value chain in three key ways: by a change in the transaction costs of interaction between firms; by a change in the contracting costs associated with outsourcing owing to changes in the costs of moral hazard for delegated search, and by a change in the price dispersion of upstream input commodities. We capture each of these effects in a new model that integrates search theory into the principal-agent framework, and establish that the optimal outsourcing contract has a simple "all or nothing" performance-based structure under fairly general assumptions. We then apply this model to contrast the effect that different information technologies have on the relative B2B search costs of different firms in the value chain, contrasting the predicted changes of proportionate, constant and convergent changes in search costs. When integrated with a detailed analysis of the nature of B2B search, these results predicts that when B2B search is information-intensive, electronic markets will facilitate an increase in outsourcing, market-based transactions and a reduction in the vertical scope of extended enterprises. In contrast, when B2B search is primarily communication-intensive, electronic markets will lead to tighter integration and an increase in the vertical scope of the extended enterprise. Our research suggest that the nature of the information technologies and of the business activities supported by an electronic market are crucial determinants of the organizational and industry changes they induce, and our results have important implications for a variety of industries in which both technological and agency issues will influence the eventual success of global IT-facilitated extended enterprise initiatives. 0 We thank

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Section: Discussionmentioning

confidence: 99%

Electronic Markets, Search Costs and Firm Boundaries

Shankar

Sundararajan

2005

SSRN Journal

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“…9 If the agent's ex post type is ω and his period 1 report wasp, then his utility from reportingω in period 2 is −(ξp(ω) − ω) 2 . The mechanism is incentive compatible in period 2 if it gives the agent an incentive to report the expected state truthfully, conditional on having reported his ability truthfully.…”

Section: The Principal's Problemmentioning

confidence: 99%

Optimal sequential delegation

Krähmer

Kováč

2016

Journal of Economic Theory

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The paper extends the optimal delegation framework pioneered by Holmström (1977, 1984) to a dynamic environment where, at the outset, the agent privately knows his ability to interpret decision relevant private information received later on. We show that any mechanism can be implemented by a menu of delegation sets and characterize the optimal menu for the uniform quadratic case. Sequential delegation is strictly better than static delegation whenever the conflict of interest is small, the agent's ability is sufficiently dispersed, and the likelihood of facing a high ability agent is sufficiently small.

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“…However, the bene…t does diminish as the …rm becomes more risk-averse. Therefore, we extend Dai et al (2006) to settings with risk-averse managers.…”

Section: Propositionmentioning

confidence: 99%

“…On the other hand, when contract terms are determined gradually as the manager acquires information about market conditions, the owner always bene…ts from a manager's expertise. In contrast to Dai et al (2006), we examine a sequential contracting process for a risk-averse manager. Since the sequential contracting process subjects a manager to uncertainties at the time of contracting, it is interesting to study the regulator's preference for contracting sequence when the manager becomes risk-averse.…”

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confidence: 99%

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Regulating a risk-averse firm under incomplete information

Dai

2008

J Regul Econ

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We examine the optimal regulatory policy for a risk-averse …rm when the …rm is imperfectly informed about its e¢ ciency parameter for a project at the time of contracting. The …rm's risk aversion shifts the optimal regulatory policy from a …xed-price contract to a cost-plus contract. The optimal regulatory policy entails undere¤ort by an ine¢ cient …rm as in Lafont and Tirole (1986) and the e¤ort distortion increases as the …rm becomes more risk-averse. Further, the regulator bene…ts from sequential contracting with the …rm where the …rm chooses contract terms gradually as it acquires information, albeit the bene…t diminishes as the …rm becomes more risk-averse.

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Delegating management to experts

Cited by 33 publications

References 29 publications

Electronic Markets, Search Costs and Firm Boundaries

Electronic Markets, Search Costs and Firm Boundaries

Optimal sequential delegation

Regulating a risk-averse firm under incomplete information

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