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Managerial Compensations and Information Sharing under Moral Hazard: Is Transparency Good?

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  • Salvatore Piccolo

    () (Università Cattolica di Milano and CSEF)

  • Emanuele Tarantino

    () (Università di Bologna and TILEC)

Abstract

We study the effects of information sharing on optimal contracting in a vertical hierarchies model with moral hazard and effort externalities. The paper has three main objectives. First, we determine and compare the equilibrium contracts with and without communication. We identify how each principal relates her agent’s wage to the opponent’s performance when they share information about agents’ performances. It turns out that the type of effort externalities across organizations is the main determinant of the responsiveness of each agent’s reward to the opponent’s performance. Second, in order to throw novel light on the emergence of information sharing agreements, we characterize the equilibria of a non- cooperative game where principals first decide whether to share information and then offer contracts to their exclusive agents. We explore the implications of introducing certification costs and show that three types of equilibria may emerge depending on the nature and (relative) strength of effort externalities: principals bilaterally share information if agents’ effort choices exhibit strong complementarity; only the principal with stronger monitoring power discloses information in equilibrium for intermediate levels of effort’s complementarity; principals do not share information if efforts are substitutes and for low values of effort’s complementarity. Moreover, differently from the common agency framework studied in Maier and Ottaviani (2009), in our model a prisoner’s dilemma may occur when efforts are substitutes and certification costs are negligible: if a higher effort by one agent reduces the opponent’s marginal productivity of effort the equilibrium involves no communication although principals would jointly be better off by sharing information. Finally, the model also offers novel testable predictions on the impact of competition on the basic trade-off between risk and incentives, the effects of organizations’ asymmetries on information disclosure policies as well as on the link between corporate control and the power of incentives.

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Bibliographic Info

Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 294.

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Date of creation: 01 Nov 2011
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Handle: RePEc:sef:csefwp:294

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Related research

Keywords: Competing Hierarchies; Information Sharing; Moral Hazard;

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References

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  1. Bennardo, Alberto & Pagano, Marco & Piccolo, Salvatore, 2009. "Multiple-Bank Lending, Creditor Rights and Information Sharing," CEPR Discussion Papers 7186, C.E.P.R. Discussion Papers.
  2. Jeanne Hagenbach & Frédéric Koessler, 2009. "Strategic Communication Networks," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00367692, HAL.
  3. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760.
  4. Alessandro Acquisti & Hal R. Varian, 2002. "Contidioning Prices on Purchase History," Microeconomics 0210001, EconWPA.
  5. Gromb, Denis & Martimort, David, 2004. "The Organization of Delegated Expertise," CEPR Discussion Papers 4572, C.E.P.R. Discussion Papers.
  6. Michael Manove & A. Jorge Padilla & Marco Pagano, 1998. "Collateral vs. Project Screening: A Model of Lazy Banks," CSEF Working Papers 10, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  7. Gromb, Denis & Martimort, David, 2007. "Collusion and the Organization of Delegated Expertise," Open Access publications from University of Toulouse 1 Capitole http://neeo.univ-tlse1.fr, University of Toulouse 1 Capitole.
  8. Calzolari, Giacomo & Pavan, Alessandro, 2006. "On the optimality of privacy in sequential contracting," Journal of Economic Theory, Elsevier, vol. 130(1), pages 168-204, September.
  9. Piccolo, Salvatore & D'Amato, Marcello & Martina, Riccardo, 2008. "Product market competition and organizational slack under profit-target contracts," International Journal of Industrial Organization, Elsevier, vol. 26(6), pages 1389-1406, November.
  10. Caillaud Bernard & Jullien Bruno & Picard Pierre, 1991. "Competing vertical structures : precommitment and renegotiation," CEPREMAP Working Papers (Couverture Orange) 9125, CEPREMAP.
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