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Optimal Management of Evolving Hierarchies

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  • Jens Leth, Hougaard
  • Juan D., Moreno-Ternero
  • Lars Peter, Østerdal

    (Department of Economics, Copenhagen Business School)

Abstract

We study the optimal management of evolving hierarchies, which abound in real-life phenomena. An initiator invests into finding a subordinate, who will bring revenues to the joint venture and who will invest herself into finding another subordinate, and so on. The higher the individual investment (which is private information), the higher the probability of finding a subordinate. A transfer scheme specifies how revenues are reallocated, via upward transfers, as the hierarchy evolves. Each transfer scheme induces a game in which agents decide their investment choices. We consider two optimality notions for schemes: initiator-optimal and socially-optimal schemes. We show that the former are schemes imposing to each member a full transfer to two recipients (the predecessor and the initiator) with a constant ratio among the transfers. We show that the latter are schemes imposing full transfers to the immediate predecessors.

Suggested Citation

  • Jens Leth, Hougaard & Juan D., Moreno-Ternero & Lars Peter, Østerdal, 2018. "Optimal Management of Evolving Hierarchies," Working Papers 11-2018, Copenhagen Business School, Department of Economics.
    • Handle: RePEc:hhs:cbsnow:2018_011
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    Cited by:

    1. Wang, Siyi & Cai, Xiaoqiang & Guan, Lei & Zhang, Lianmin, 2022. "What do institutional investors bring to initial coin offerings (ICOs)?," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 167(C).
    2. Dehez, Pierre, 2023. "Sharing a collective probability of success," Mathematical Social Sciences, Elsevier, vol. 123(C), pages 122-127.
    3. Jens Gudmundsson & Jens Leth Hougaard & Juan D. Moreno-Ternero & Lars Peter {O}sterdal, 2023. "Successive Incentives," Papers 2311.12494, arXiv.org.

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    More about this item

    Keywords

    Optimal transfer schemes; Hierarchies; Management; Nash equilibrium;
    All these keywords.

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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