Responsibility Centers, Decision Rights, and Synergies

2019 ◽  
Vol 95 (2) ◽  
pp. 1-29 ◽  
Author(s):  
Tim Baldenius ◽  
Beatrice Michaeli
Keyword(s):  
Optimal Allocation ◽  
Incentive Contracts ◽  
The Other ◽  
Risk Averse ◽  
Business Unit ◽  
Decision Rights ◽  
Specific Investments ◽  
Lumpy Investments ◽  
Allocation Of Decision Rights ◽  
Jel Classifications

ABSTRACT We consider the optimal allocation of decision rights over noncontractible specific investments. Risk-averse business unit managers each engage in general (stand-alone) operations and invest in joint projects that benefit their own and other divisions. Which of the managers should have the authority to choose these investments? With scalable investments, we show that decision rights should be bundled in the hands of the manager facing the more volatile environment. With discrete (lumpy) investments, on the other hand, decision rights should be split between the managers, provided they face comparable levels of uncertainty in their general operations. Splitting decision rights better leverages the inherent investment complementarity, counter to conventional wisdom. Our model generates empirical predictions for the equilibrium association of organizational structure and managers' incentive contracts: bundling of decision rights results in pay-performance sensitivity (PPS) divergence across divisions; splitting them results in PPS convergence. JEL Classifications: M41; D23; D86.

Decentralized Task Assignment and Centralized Contracting: On the Optimal Allocation of Authority

2013 ◽  
Vol 26 (1) ◽  
pp. 33-55 ◽  
Author(s):  
Steffen Reichmann ◽  
Anna Rohlfing-Bastian
Keyword(s):  
Organizational Design ◽  
Optimal Allocation ◽  
Task Assignment ◽  
Incentive Contracts ◽  
Incentive System ◽  
Decision Rights ◽  
Decision Authority ◽  
Hierarchical Levels ◽  
Allocation Of Decision Rights ◽  
Optimal Incentives

ABSTRACT To provide efficient incentives, the three components of an incentive system (i.e., performance measurement, rewards, and the allocation of decision rights) need to be balanced against each other. In practice, the authority to decide on these components is frequently distributed across hierarchical levels, thus requiring adjusting centralized decisions with regard to decentralized authority. This paper investigates the centralized design of incentive contracts when decision authority, with respect to the allocation of tasks, is delegated to lower hierarchical levels. It provides an analysis of the optimal allocation of authority (i.e., “who should be the boss”) and considers the interdependencies between organizational design choices and the design of optimal incentives.

Pesticide Use and Risk Aversion in the French Wine Sector

2018 ◽  
Vol 13 (4) ◽  
pp. 451-460 ◽  
Author(s):  
Joël Aka ◽  
Adeline Alonso Ugaglia ◽  
Jean-Marie Lescot
Keyword(s):  
Risk Aversion ◽  
Maximum Yield ◽  
The Other ◽  
Risk Attitudes ◽  
Pesticide Use ◽  
Risk Averse ◽  
Network Database ◽  
Farm Accountancy Data Network ◽  
Wine Sector ◽  
Jel Classifications

AbstractThis paper studies the risk attitudes of winegrowers in France. In French viticulture, most of the production is done under an appellation regime that constrains maximum authorized yields. We consider a trans-log cost function under the constraint of this maximum yield and estimate winegrowers' attitudes to risk. Our estimates are based on the European Farm Accountancy Data Network database (2005–2014) and data from the French National Institute of Origin and Quality. We find that winegrowers are risk averse. For the majority of winegrowers, risk aversion is declining with expected profit. In the Champagne region, however, where expected profits are far higher than in the other regions, we observe the reverse relation: winegrowers become more risk averse as expected profits rise. (JEL Classifications: C13, C33, O33, Q16).

scholarly journals Performance Measures and Intra-Firm Spillovers: Theory and Evidence

2017 ◽  
Vol 30 (3) ◽  
pp. 117-144 ◽  
Author(s):  
Jan Bouwens ◽  
Christian Hofmann ◽  
Laurence van Lent
Keyword(s):  
Performance Measures ◽  
Interaction Effect ◽  
The Other ◽  
Business Unit ◽  
Net Income ◽  
Business Units ◽  
Jel Classifications

ABSTRACT We revisit the question of how performance measures are used to evaluate business unit managers in response to intra-firm spillovers. Specifically, we are interested in variation in the relative incentive weightings of aggregated “above-level” measures (e.g., firm-wide net income), “own-level” business unit measures (e.g., business unit profit), and specific “below-level” measures (e.g., R&D expenses) in response to spillover arising from either the focal unit's effect on other business units or the other units' effect on the focal unit. Our theory highlights complementarity between above- and below-level measures and the existence of an interaction between the two directions of spillovers. Based on a survey of 122 business unit managers, we report evidence consistent with an interaction effect and with complementarity between above- and below-level measures. In particular, we show that firms increase the weighting on both above- and below-level measures when they are coping simultaneously with high levels of spillovers on other units and spillovers from other units. JEL Classifications: D23; L22; M12; M4.

Who Should Select New Employees, Headquarters or the Unit Manager? Consequences of Centralizing Hiring at a Retail Chain

2019 ◽  
Vol 95 (4) ◽  
pp. 173-198 ◽  
Author(s):  
Carolyn Deller ◽  
Tatiana Sandino
Keyword(s):  
Data Availability ◽  
Business Unit ◽  
Difference In Differences ◽  
Decision Rights ◽  
Local Conditions ◽  
New Employees ◽  
Retail Chain ◽  
Unit Manager ◽  
Local Advantage ◽  
Retail Company

ABSTRACT We examine how changing the allocation of hiring decision rights in a multiunit organization affects employee-firm match quality, contingent on a unit's circumstances. Our research site, a U.S. retail chain, switched from a decentralized hiring model (hiring by business unit managers—in our case, store managers) to centralized hiring (in this study, by the head office). While centralized hiring can ensure that enough resources are invested in hiring people aligned with company values, it can also neglect the unit managers' local knowledge. Using difference-in-differences analyses, we find that the switch is associated with relatively higher employee departure rates and, thus, poorer matches if the business unit manager has a local advantage; that is, if the store serves repeat customers, serves a demographically atypical market, or poses higher information-gathering costs for headquarters. In these cases, the unit manager may be more informed than headquarters about which candidates best match local conditions. Data Availability: The analyses presented in this study are based on data shared by a U.S. retail company. The data are confidential, according to a nondisclosure agreement between the company and the authors.

Investments and Risk Transfers

2017 ◽  
Vol 92 (6) ◽  
pp. 1-23 ◽  
Author(s):  
Tim Baldenius ◽  
Beatrice Michaeli
Keyword(s):  
Moral Hazard ◽  
Risk Premium ◽  
Bargaining Power ◽  
Risk Premia ◽  
The Other ◽  
Investment Risk ◽  
Incomplete Contracting ◽  
Risk Transfer ◽  
Specific Investments ◽  
Division Managers

ABSTRACT We demonstrate a novel link between relationship-specific investments and risk in a setting where division managers operate under moral hazard and collaborate on joint projects. Specific investments increase efficiency at the margin. This expands the scale of operations and thereby adds to the compensation risk borne by the managers. Accounting for this investment/risk link overturns key findings from prior incomplete contracting studies. We find that if the investing manager has full bargaining power vis-à-vis the other manager, he will underinvest relative to the benchmark of contractible investments; with equal bargaining power, however, he may overinvest. The reason is that the investing manager internalizes only his own share of the investment-induced risk premium (we label this a “risk transfer”), whereas the principal internalizes both managers' incremental risk premia. We show that high pay-performance sensitivity (PPS) reduces the managers' incentives to invest in relationship-specific assets. The optimal PPS, thus, trades off investment and effort incentives.

The Value of Information in the Hold-Up Problem

2004 ◽  
Vol 5 (2) ◽  
pp. 177-203 ◽  
Author(s):  
Thomas Pfeiffer
Keyword(s):  
Information System ◽  
Information Structure ◽  
Value Of Information ◽  
The Other ◽  
Information Control ◽  
Ceteris Paribus ◽  
Head Office ◽  
Specific Investments ◽  
Negative Effect ◽  
Central Management

Abstract In the literature, the information structure of the hold-up problem is typically assumed to be exogenous. In this paper, we introduce an additional stage at which the head office may grant individual divisions access to an information system before they undertake their specific investments. Although more information ceteris paribus enhances each divisions’ profits, more information can reduce divisions’ investments and destroy synergies for the other division that would have been generated by the investments. If this negative effect dominates, then information can be harmful for the entire company. Hence, information control can be a subtle force to deal with the hold-up problem to a certain extent. In this paper we analyze those conditions under which information is either harmful or beneficial for central management.

The Effects of Online Assignments and Weekly Deadlines on Student Outcomes in a Macroeconomics Course

2020 ◽  
pp. 056943452096825
Author(s):  
Laurie A. Miller ◽  
James R. Schmidt
Keyword(s):  
Student Retention ◽  
Adaptive Learning ◽  
Student Outcomes ◽  
Knowledge Retention ◽  
The Other ◽  
Student Knowledge ◽  
Final Exam ◽  
Online Assignments ◽  
Positive Effect ◽  
Jel Classifications

This study examined how weekly, externally set deadlines affected the completion of adaptive learning assignments and student outcomes in an introductory macroeconomics course. We imposed different deadline schemes for the same adaptive learning assignments in two sections of the course. One section was given flexible deadlines and the other section was given rigid weekly deadlines. We found that weekly deadlines did not affect assignment completions or total points earned on unit exams. We investigated how the adaptive learning assignments affected student retention of material. A measure of staying on pace in the course provided a positive effect on the comprehensive final exam for students with weekly deadlines. The weekly deadlines may not have influenced assignment completions but consistent engagement with the flow of topics through the course increased student knowledge retention. Regardless of deadline type, completions of adaptive learning assignments positively affected outcomes on the unit exams and final exam. JEL Classifications: A20, A22

Do Migrants Think Differently? Evidence from Eastern European and Post-Soviet States

2018 ◽  
Vol 53 (3) ◽  
pp. 831-868 ◽  
Author(s):  
Ruxanda Berlinschi ◽  
Ani Harutyunyan
Keyword(s):  
Risk Aversion ◽  
International Migration ◽  
The Other ◽  
Eastern European ◽  
Risk Averse ◽  
Economic Liberalism ◽  
Self Selection ◽  
Using Data ◽  
Politically Active ◽  
Beliefs And Attitudes

This research investigates migrant self-selection on values, beliefs, and attitudes using data from Eastern European and former Soviet countries. We find that individuals who intend to emigrate are more politically active, more critical of governance and institutions, more tolerant toward other cultures, less tolerant of cheating, more optimistic, and less risk averse. With the exception of risk aversion, all selection patterns are heterogeneous across regions of origin. On the other hand, no self-selection pattern is detected on education, willingness to pay for public goods, and economic liberalism. These findings provide new insights into the determinants of international migration and reveal some of its less known consequences, such as a possible reduction of domestic pressure for political improvements in post-Soviet states due to politically active citizens’ higher propensity to emigrate.

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