Download Motivation problem

Motivation: contracts, information and incentives
M/R Chapter 5
The primary aim: Discuss theory about contracts that
promote efficient outcomes of organizational processes
Costs of allocating resources through
”organisations”
Assumption: conditions for ”no wealth effects” are not
satisfied
• Costs for bargaining about employment contracts
(managers and other employees)
• Payments for performance incentives
Illustrative example
Actions that can be taken when a company is too big to be
managed effectively:
• Slicing-up the value chain
• Split up property
• Out-sourcing
Limitiations on possibilities to divide property:
• Assets are cospecialized (loose much of their value if
used separately to produce independent products or
services)
• Secure growth opportunities by appropriate contracts
with skilled employees
Efficient organisation to secure future growth
opportunities
Motivation problem when ”no Wealth
Effects”
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Contracts are imperfect
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future events impossible to forecast and parties have private
information they do not want to reveal as they can gain from
keeping it secret
Opportunistic behaviour
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Moral hazard: Opportunism arising when actions required or
desired under the contract is not observable
Adverse selection: Opportunism arising when one party has
private information about something that affects the other’s
net benefit from the contract and when only those whose
private information implies that the contract will be
disadvantageous for the other party agree to a contract.
Motivation problem
To align different interests as far as possible
An efficient allocation mechanism:
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There is no alternative method that is feasible in the presence
of incentive constraints and that all the relevant parties prefer
it to the original mechanism.
Incentive efficient mechanisms in case of ”no Wealth
Effects”
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Engineers, who are going to collaborate about a project to
obtain a certain type of technological knowledge
This knowledge is a public good: All participants are free to
use the knowledge as they want after the project is
terminated.
Each participant is free to leave the project.
If they do so, they do not get the benefits of the project
Total cost of the project: 1 euro
Two groups of engineer: 1) getting a value of 2 euro from
its being undertaken and 2) indifferent to the project
getting 0 euro.
No one can be forced to pay more than it is worth to her
Private information: each individual’s valuation of the
project
Somebody may ‘free-ride’, falsely declaring that they value
the project to 0 euro hoping that someone else will pay
for it (Adverse selection)
The probability that any single individual values the project
positively: p
The costs are split equally among the m individuals