IDEAS home Printed from https://ideas.repec.org/a/eee/indorg/v41y2015icp9-18.html
   My bibliography  Save this article

The value of transparency in multidivisional firms

Author

Listed:
  • Piccolo, Salvatore
  • Tarantino, Emanuele
  • Ursino, Giovanni

Abstract

We study internal incentives, transparency and firm performance in multidivisional organizations. Two independent divisions of the same firm design internal incentives, and decide whether to publicly disclose their performances. In each division a risk-neutral principal deals with a risk-averse (exclusive) agent under moral hazard. Each agent exerts an unverifiable effort that creates a spillover on the effort cost of the other agent. We first study the determinants of the optimal principal-agent contract with and without performance transparency. Then, we show how effort spillovers affect the equilibrium communication behavior of each division. Both principals commit to disclose the performance of their agents in equilibrium when efforts are complements, while no communication is the only equilibrium outcome when efforts are substitutes.

Suggested Citation

  • Piccolo, Salvatore & Tarantino, Emanuele & Ursino, Giovanni, 2015. "The value of transparency in multidivisional firms," International Journal of Industrial Organization, Elsevier, vol. 41(C), pages 9-18.
    • Handle: RePEc:eee:indorg:v:41:y:2015:i:c:p:9-18
    DOI: 10.1016/j.ijindorg.2015.04.004
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0167718715000478
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.ijindorg.2015.04.004?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760, December.
    2. Tim Baldenius & Stefan Reichelstein, 2006. "External and Internal Pricing in Multidivisional Firms," Journal of Accounting Research, Wiley Blackwell, vol. 44(1), pages 1-28, March.
    3. Lode Li & Hongtao Zhang, 2008. "Confidentiality and Information Sharing in Supply Chain Coordination," Management Science, INFORMS, vol. 54(8), pages 1467-1481, August.
    4. Richard N. Clarke, 1983. "Collusion and the Incentives for Information Sharing," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 383-394, Autumn.
    5. Fauli-Oller, Ramon & Giralt, Magdalena, 1995. "Competition and Cooperation within a Multidivisional Firm," Journal of Industrial Economics, Wiley Blackwell, vol. 43(1), pages 77-99, March.
    6. Vives, Xavier, 1984. "Duopoly information equilibrium: Cournot and bertrand," Journal of Economic Theory, Elsevier, vol. 34(1), pages 71-94, October.
    7. 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.
    8. Yingyi Qian & Gerard Roland & Chenggang Xu, 2006. "Coordination and Experimentation in M-Form and U-Form Organizations," Journal of Political Economy, University of Chicago Press, vol. 114(2), pages 366-402, April.
    9. Gal-Or, Esther, 1985. "Information Sharing in Oligopoly," Econometrica, Econometric Society, vol. 53(2), pages 329-343, March.
    10. Julio J. Rotemberg, 1999. "Process‐ Versus Function‐Based Hierarchies," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 8(4), pages 453-487, December.
    11. Bertoletti, Paolo & Poletti, Clara, 1996. "A Note on Endogenous Firm Efficiency in Cournot Models of Incomplete Information," Journal of Economic Theory, Elsevier, vol. 71(1), pages 303-310, October.
    12. Eric Maskin & Yingyi Qian & Chenggang Xu, 2000. "Incentives, Information, and Organizational Form," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(2), pages 359-378.
    13. Michael L. Katz, 1991. "Game-Playing Agents: Unobservable Contracts as Precommitments," RAND Journal of Economics, The RAND Corporation, vol. 22(3), pages 307-328, Autumn.
    14. M. Harris & C. H. Kriebel & A. Raviv, 1982. "Asymmetric Information, Incentives and Intrafirm Resource Allocation," Management Science, INFORMS, vol. 28(6), pages 604-620, June.
    15. Norbert Maier & Marco Ottaviani, 2009. "Information Sharing in Common Agency: When is Transparency Good?," Journal of the European Economic Association, MIT Press, vol. 7(1), pages 162-187, March.
    16. Caillaud, Bernard & Jullien, B & Picard, P, 1995. "Competing Vertical Structures: Precommitment and Renegotiation," Econometrica, Econometric Society, vol. 63(3), pages 621-646, May.
    17. David Martimort, 1996. "Exclusive Dealing, Common Agency, and Multiprincipals Incentive Theory," RAND Journal of Economics, The RAND Corporation, vol. 27(1), pages 1-19, Spring.
    18. David Besanko & Pierre Régibeau & Katharine E. Rockett, 2005. "A Multi‐Task Principal‐Agent Approach To Organizational Form," Journal of Industrial Economics, Wiley Blackwell, vol. 53(4), pages 437-467, December.
    19. Paul R. Milgrom, 1981. "Good News and Bad News: Representation Theorems and Applications," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 380-391, Autumn.
    20. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, December.
    21. Piccolo, Salvatore & Pagnozzi, Marco, 2013. "Information sharing between vertical hierarchies," Games and Economic Behavior, Elsevier, vol. 79(C), pages 201-222.
    22. J. A. Mirrlees, 1999. "The Theory of Moral Hazard and Unobservable Behaviour: Part I," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(1), pages 3-21.
    23. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-328, March.
    24. Elazar Berkovitch & Ronen Israel & Yossi Spiegel, 2010. "A Double Moral Hazard Model of Organization Design," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(1), pages 55-85, March.
    25. Abbie Griffin & John R. Hauser, 1992. "Patterns of Communication Among Marketing, Engineering and Manufacturing---A Comparison Between Two New Product Teams," Management Science, INFORMS, vol. 38(3), pages 360-373, March.
    26. Wettstein, David, 1994. "Allocation of resources in a divisionalized firm," Mathematical Social Sciences, Elsevier, vol. 28(1), pages 51-58, August.
    27. 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.
    28. William Novshek & Hugo Sonnenschein, 1982. "Fulfilled Expectations Cournot Duopoly with Information Acquisition and Release," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 214-218, Spring.
    29. Roberts, Robin W., 1992. "Determinants of corporate social responsibility disclosure: An application of stakeholder theory," Accounting, Organizations and Society, Elsevier, vol. 17(6), pages 595-612, August.
    30. Theodore Groves & Martin Loeb, 1979. "Incentives in a Divisionalized Firm," Management Science, INFORMS, vol. 25(3), pages 221-230, March.
    31. Albert Y. Ha & Shilu Tong, 2008. "Contracting and Information Sharing Under Supply Chain Competition," Management Science, INFORMS, vol. 54(4), pages 701-715, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Piccolo, Salvatore & Pagnozzi, Marco, 2013. "Information sharing between vertical hierarchies," Games and Economic Behavior, Elsevier, vol. 79(C), pages 201-222.
    2. Karakoç, Gülen & Pagnozzi, Marco & Piccolo, Salvatore, 2022. "The value of transparency in dynamic contracting with entry," International Journal of Industrial Organization, Elsevier, vol. 85(C).
    3. Andreu, Enrique & Neven, Damien & Piccolo, Salvatore, 2023. "Price authority and information sharing with competing supply chains," International Journal of Industrial Organization, Elsevier, vol. 88(C).
    4. Jha, Aditya & Fernandes, Kiran & Xiong, Yu & Nie, Jiajia & Agarwal, Neelesh & Tiwari, Manoj K., 2017. "Effects of demand forecast and resource sharing on collaborative new product development in supply chain," International Journal of Production Economics, Elsevier, vol. 193(C), pages 207-221.
    5. Zhongyuan Hao & Li Jiang & Wenli Wang, 2018. "Impacts of sequential acquisition, market competition mode, and confidentiality on information flow," Naval Research Logistics (NRL), John Wiley & Sons, vol. 65(2), pages 135-159, March.
    6. Eliane Catilina, 2002. "Information Acquisition in Cournot Markets: An (enhanced) two- Stage Approach," Game Theory and Information 0205005, University Library of Munich, Germany.
    7. Salvatore Piccolo, 2011. "Communicating Vertical Hierarchies: the Adverse Selection Case," CSEF Working Papers 273, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    8. Troya-Martinez, Marta, 2016. "Vagueness and information-sharing," Games and Economic Behavior, Elsevier, vol. 100(C), pages 301-320.
    9. Hyoduk Shin & Tunay I. Tunca, 2010. "Do Firms Invest in Forecasting Efficiently? The Effect of Competition on Demand Forecast Investments and Supply Chain Coordination," Operations Research, INFORMS, vol. 58(6), pages 1592-1610, December.
    10. Wei-Shiun Chang & Daniel A. Sanchez-Loor, 2020. "Downstream Information Leaking and Information Sharing Between Partially Informed Retailers," Journal of Industry, Competition and Trade, Springer, vol. 20(4), pages 733-760, December.
    11. Li Jiang & Zhongyuan Hao, 2016. "Incentive-Driven Information Dissemination in Two-Tier Supply Chains," Manufacturing & Service Operations Management, INFORMS, vol. 18(3), pages 393-413, July.
    12. Salvatore Piccolo & Emanuele Tarantino, 2011. "Managerial Compensations and Information Sharing under Moral Hazard: Is Transparency Good?," CSEF Working Papers 294, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    13. Zhang, Juliang & Chen, Jian, 2013. "Coordination of information sharing in a supply chain," International Journal of Production Economics, Elsevier, vol. 143(1), pages 178-187.
    14. Iván Major, 2006. "Why do (or do not) banks share customer information? A comparison of mature private credit markets and markets in transition," CERS-IE WORKING PAPERS 0603, Institute of Economics, Centre for Economic and Regional Studies, revised 24 Apr 2006.
    15. Dan Kovenock & Florian Morath & Johannes Münster, 2015. "Information Sharing in Contests," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 24(3), pages 570-596, September.
    16. Ackert, Lucy F. & Church, Bryan K. & Sankar, Mandira Roy, 2000. "Voluntary disclosure under imperfect competition: experimental evidence," International Journal of Industrial Organization, Elsevier, vol. 18(1), pages 81-105, January.
    17. Lagerlof, Johan N.M., 2007. "Insisting on a non-negative price: Oligopoly, uncertainty, welfare, and multiple equilibria," International Journal of Industrial Organization, Elsevier, vol. 25(4), pages 861-875, August.
    18. Qiu, Qijun & Hao, Zhongyuan & Jiang, Li, 2022. "Strategic information flow under the influence of industry structure," European Journal of Operational Research, Elsevier, vol. 298(3), pages 1175-1191.
    19. Goltsman, Maria & Pavlov, Gregory, 2014. "Communication in Cournot oligopoly," Journal of Economic Theory, Elsevier, vol. 153(C), pages 152-176.
    20. Xu, Su Xiu & Lu, Qiang & Huang, George Q. & Zhang, Ting, 2013. "Scope economies, market information, and make-or-buy decision under asymmetric information," International Journal of Production Economics, Elsevier, vol. 145(1), pages 339-348.

    More about this item

    Keywords

    Multidivisional firms; Transparency; Moral hazard;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:indorg:v:41:y:2015:i:c:p:9-18. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505551 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.