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Incentives, Information, and Organizational Form

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Author Info

  • Maskin, Eric
  • Qian, Yingyi
  • Xu, Chenggang

Abstract

We model an organization as a hierarchy of managers erected on top of a technology (here consisting of a collection of plants). In our framework, the role of a manager is to take steps to reduce the adverse consequences of shocks that affect the plants beneath him. We argue that different organizational forms give rise to different information about managers' performance and therefore differ according to how effective incentives can be in encouraging a good performance. In particular, we show that, under certain assumptions, the M-form (multi-divisional form) is likely to provide better incentives than the U-form (unitary form) because it promotes yardstick competition (i.e. relative performance evaluation) more effectively. We conclude by presenting evidence that the assumptions on which this comparison rests are satisfied for Chinese data. Copyright 2000 by The Review of Economic Studies Limited

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Review of Economic Studies.

Volume (Year): 67 (2000)
Issue (Month): 2 (April)
Pages: 359-78

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Handle: RePEc:bla:restud:v:67:y:2000:i:2:p:359-78

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References

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  1. Gerard Roland & Chenggang Xu, 2000. "Coordinating Changes in M-Form and U-Form Organizations," Econometric Society World Congress 2000 Contributed Papers 0780, Econometric Society.
  2. Eric Maskin & Yingyi Qian & Chenggang Xu, 1997. "Incentives, Information, and Organizational Form," Working Papers 97034, Stanford University, Department of Economics.
  3. Bengt Holmstrom, 1981. "Moral Hazard in Teams," Discussion Papers 471, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-64, October.
  5. Kim, Son Ku, 1995. "Efficiency of an Information System in an Agency Model," Econometrica, Econometric Society, vol. 63(1), pages 89-102, January.
  6. Aghion, Philippe & Tirole, Jean, 1995. "Some implications of growth for organizational form and ownership structure," European Economic Review, Elsevier, vol. 39(3-4), pages 440-455, April.
  7. Bolton, Patrick & Farrell, Joseph, 1990. "Decentralization, Duplication, and Delay," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 803-26, August.
  8. Andrei Shleifer, 1985. "A Theory of Yardstick Competition," RAND Journal of Economics, The RAND Corporation, vol. 16(3), pages 319-327, Autumn.
  9. Holmstrom, Bengt & Milgrom, Paul, 1994. "The Firm as an Incentive System," American Economic Review, American Economic Association, vol. 84(4), pages 972-91, September.
  10. Jacques Cremer, 1980. "A Partial Theory of the Optimal Organization of a Bureaucracy," Bell Journal of Economics, The RAND Corporation, vol. 11(2), pages 683-693, Autumn.
  11. Aoki, Masahiko, 1986. "Horizontal vs. Vertical Information Structure of the Firm," American Economic Review, American Economic Association, vol. 76(5), pages 971-83, December.
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