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Heterogeneity in Organizational Form: Why Otherwise Identical Firms Choose Different Incentives for Their Managers

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Benjamin E. Hermalin

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Abstract

Product-market competition affects the benefits from providing incentives to managers. In particular, the best response to other firms providing strong incentives can be to provide weak incentives. Conversely, the best response to other firms providing weak incentives can be to provide strong incentives. In equilibrium only a fraction of the firms may, therefore, provide strong incentives. Moreover, all equilibria may exhibit heterogeneity in incentives due to the nonconvexities inherent in the underlying agency problem between firms and their managers. This article also investigates how increased competition affects the strength of the incentives provided in the equilibrium.

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Publisher Info
Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 25 (1994)
Issue (Month): 4 (Winter)
Pages: 518-537
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Handle: RePEc:rje:randje:v:25:y:1994:i:winter:p:518-537

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  1. Rabah Amir & Filomena Garcia & Malgorzata Knauff, 2006. "Endogenous Heterogeneity in Strategic Models: Symmetry-breaking via Strategic Substitutes and Nonconcavities," Working Papers 2006/29, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon.. [Downloadable!]
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  2. Ferdinand von Siemens, 2005. "Fairness, Adverse Selection, and Employment Contracts," Discussion Papers 58, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
  3. Renée Adams & Benjamin E. Hermalin & Michael S. Weisbach, 2008. "The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey," NBER Working Papers 14486, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Marcel Boyer & Jean-Jacques Laffont, 2000. "Competition and the Reform of Incentive Schemes in the Regulated Sector," CIRANO Working Papers 2000s-58, CIRANO. [Downloadable!]
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  5. Vives, Xavier, 2006. "Innovation and competitive pressure," IESE Research Papers D/634, IESE Business School.
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  6. Yijiang Wang, . "Demand, Supply and Coordination: An Integrated Theory of the Division of Labor," Working Papers 0405, Industrial Relations Center, University of Minnesota (Twin Cities Campus). [Downloadable!]
  7. Walter A Cont, 2001. "Essays on Contract Design: Delegation and Agency Problems, and Monitoring Under Collusion," Levine's Working Paper Archive 625018000000000122, David K. Levine. [Downloadable!]
  8. Glazer, Amihai & Kanniainen, Vesa & Poutvaara, Panu, 2004. "Initial Luck, Status-Seeking and Snowballs Lead to Corporate Success and Failure," IZA Discussion Papers 1426, Institute for the Study of Labor (IZA). [Downloadable!]
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  9. Cronqvist, Henrik & Low, Angie & Nilsson, Mattias, 2007. "Does Corporate Culture Matter for Firm Policies?," SIFR Research Report Series 48, Institute for Financial Research. [Downloadable!]
  10. Iain Cockburn & Rebecca Henderson & Scott Stern, 1999. "The Diffusion of Science-Driven Drug Discovery: Organizational Change in Pharmaceutical Research," NBER Working Papers 7359, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Michael Kosfeld & Ferdinand von Siemens, 2007. "Competition, Cooperation, and Corporate Culture," IZA Discussion Papers 2927, Institute for the Study of Labor (IZA). [Downloadable!]
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  12. Zhilan Feng & Chinmoy Ghosh & C. Sirmans, 2007. "Director Compensation and CEO Bargaining Power in REITs," The Journal of Real Estate Finance and Economics, Springer, vol. 35(3), pages 225-251, October. [Downloadable!] (restricted)
  13. Amir, Rabah & Wooders, John, 1997. "One-Way Spillovers, Endogenous Innovator/Imitator Roles and Research Joint Ventures," Economics Series 43, Institute for Advanced Studies. [Downloadable!]
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  14. Wallace HUFFMAN & Richard E. JUST, 1995. "Transaction Costs, Fads, And Politically Motivated Misdirection In Agricultural Research," Staff Papers 277, Iowa State University Department of Economics. [Downloadable!]
  15. Cronqvist, Henrik & Low, Angie & Nilsson, Mattias, 2007. "Does Corporate Culture Matter for Firm Policies?," Working Paper Series 2007-1, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
  16. Debashis Pal & Arup Bose & David Sappington, 2008. "Asymmetric Treatment of Identical Agents in Teams," University of Cincinnati, Economics Working Papers Series 2008-08, University of Cincinnati, Department of Economics. [Downloadable!]
  17. Benjamin E. Hermalin & Michael S. Weisbach, 2001. "Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature," NBER Working Papers 8161, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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