IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/10432.html
   My bibliography  Save this paper

Multifaceted Transactions, Incentives, and Organizational Form

Author

Listed:
  • Habib, Michel

Abstract

When not every facet of a transaction can be contracted upon and transacting parties' payoffs are asymmetric, low-powered incentives for those facets of the transaction that can be contracted upon may be necessary to avoid too large a distortion in those facets that cannot be contracted upon (Barzel, 1982, 1997; Hansmann, 1996; Holmstrom and Milgrom, 1991). Distinguishing between different types of capital (financial, physical, intangible), different forms of incentives (performance pay, organizational form, ownership), and different transacting pairs (manager/shareholder, supplier/buyer, customer/firm), and using a model of investment developed by Falkinger (2014), we extend the preceding insight to explain partnerships, mutuals, cooperatives, government ownership, and vertical integration. Distinguishing between resource allocation and resource creation, we show that resource creation calls for higher powered incentives than does resource allocation. Allowing for diversification-induced economies of scale in the use of capital, we establish the result that larger, more diversified firms offer higher-powered incentives. Finally, allowing for the partial contractibility of investment and the use of capital, we show that the former decreases the power of incentives whereas the latter increases that power, thereby providing a combined explanation for the Nineteenth- and Twentieth-Century rise of large military and civilian bureaucracies and the more recent outsourcing of products and services previously sourced internally. Our results suggest that the recognition of the multiple facets of most transactions can help explain numerous institutional arrangements, as well as the apparent lack of disadvantage of low-powered-incentives organizations competing with their high-powered-incentives counterparts (Bohren and Josefsen, 2013; Hansmann and Thomsen, 2012).

Suggested Citation

  • Habib, Michel, 2015. "Multifaceted Transactions, Incentives, and Organizational Form," CEPR Discussion Papers 10432, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10432
    as

    Download full text from publisher

    File URL: https://cepr.org/publications/DP10432
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

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

    References listed on IDEAS

    as
    1. Itoh, Hideshi, 1992. "Cooperation in Hierarchical Organizations: An Incentive Perspective," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 8(2), pages 321-345, April.
    2. Valnek, Tomas, 1999. "The comparative performance of mutual building societies and stock retail banks," Journal of Banking & Finance, Elsevier, vol. 23(6), pages 925-938, June.
    3. Bøhren, Øyvind & Josefsen, Morten G., 2013. "Stakeholder rights and economic performance: The profitability of nonprofits," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4073-4086.
    4. Brickley, James A. & Zimmerman, Jerold L., 2001. "Changing incentives in a multitask environment: evidence from a top-tier business school," Journal of Corporate Finance, Elsevier, vol. 7(4), pages 367-396, December.
    5. Douglas W. Allen, 2005. "Purchase, Patronage, and Professions: Incentives and the Evolution of Public Office in Pre-Modern Britain," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 161(1), pages 57-79, March.
    6. Erin Anderson & David C. Schmittlein, 1984. "Integration of the Sales Force: An Empirical Examination," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 385-395, Autumn.
    7. Erin Anderson, 1985. "The Salesperson as Outside Agent or Employee: A Transaction Cost Analysis," Marketing Science, INFORMS, vol. 4(3), pages 234-254.
    8. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
    9. Oliver Hart & Andrei Shleifer & Robert W. Vishny, 1997. "The Proper Scope of Government: Theory and an Application to Prisons," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(4), pages 1127-1161.
    10. Mayers, David & Smith, Clifford W, Jr, 1981. "Contractual Provisions, Organizational Structure, and Conflict Control in Insurance Markets," The Journal of Business, University of Chicago Press, vol. 54(3), pages 407-434, July.
    11. Barzel,Yoram, 1997. "Economic Analysis of Property Rights," Cambridge Books, Cambridge University Press, number 9780521597135, February.
    12. Iain Cockburn & Rebecca Henderson & Scott Stern, 1999. "Balancing Incentives: The Tension Between Basic and Applied Research," NBER Working Papers 6882, National Bureau of Economic Research, Inc.
    13. Pierre Azoulay, 2004. "Capturing Knowledge within and across Firm Boundaries: Evidence from Clinical Development," American Economic Review, American Economic Association, vol. 94(5), pages 1591-1612, December.
    14. Yoram Barzel & Wing Suen, 1997. "Equity as a Guarantee," Working Papers UWEC-2005-17, University of Washington, Department of Economics.
    15. Josef Falkinger, 2014. "In search of economic reality under the veil of financial markets," ECON - Working Papers 154, Department of Economics - University of Zurich.
    16. Yoram Barzel, 2006. "Prevention Is Better than Cure: The Role of IPO Syndicates in Precluding Information Acquisition," The Journal of Business, University of Chicago Press, vol. 79(6), pages 2911-2924, November.
    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. Josef Falkinger & Michel A. Habib, 2021. "Managerial discretion and shareholder capital at risk," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(7-8), pages 1215-1245, July.
    2. Josef Falkinger & Michel Habib, 2017. "Principle or Opportunism? Discretion, Capital, and Incentives," Swiss Finance Institute Research Paper Series 17-73, Swiss Finance Institute.
    3. Miguel Espinosa, 2021. "Labor Boundaries and Skills: The Case of Lobbyists," Management Science, INFORMS, vol. 67(3), pages 1586-1607, March.
    4. Andersson, Fredrik, 2004. "A Trickle-Down Theory of Incentives with Applications to Privatization and Outsourcing," Working Papers 2004:13, Lund University, Department of Economics.
    5. Paul H. Jensen & Robin E. Stonecash, 2004. "The Efficiency of Public Sector Outsourcing Contracts: A Literature Review," Melbourne Institute Working Paper Series wp2004n29, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    6. Martimort, David & Pouyet, Jerome, 2008. "To build or not to build: Normative and positive theories of public-private partnerships," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 393-411, March.
    7. Michael Waldman, 2012. "Theory and Evidence in Internal LaborMarkets [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    8. Marta De Philippis, 2021. "Multi-Task Agents and Incentives: The Case of Teaching and Research for University Professors," The Economic Journal, Royal Economic Society, vol. 131(636), pages 1643-1681.
    9. Andersson Fredrik, 2011. "Make-or-Buy Decisions and the Manipulability of Performance Measures," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 11(1), pages 1-30, December.
    10. Bengt Holmstrom & John Roberts, 1998. "The Boundaries of the Firm Revisited," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 73-94, Fall.
    11. Josh Lerner & Ulrike Malmendier, 2010. "Contractibility and the Design of Research Agreements," American Economic Review, American Economic Association, vol. 100(1), pages 214-246, March.
    12. Bengt Holmström, 2017. "Pay for Performance and Beyond," American Economic Review, American Economic Association, vol. 107(7), pages 1753-1777, July.
    13. Francine Lafontaine & Margaret E. Slade, 1998. "Incentive Contracting and the Franchise Decision," NBER Working Papers 6544, National Bureau of Economic Research, Inc.
    14. Francine Lafontaine & Margaret Slade, 2007. "Vertical Integration and Firm Boundaries: The Evidence," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 629-685, September.
    15. David Fitoussi & Vijay Gurbaxani, 2012. "IT Outsourcing Contracts and Performance Measurement," Information Systems Research, INFORMS, vol. 23(1), pages 129-143, March.
    16. Paul H. Jensen & Robin E. Stonecash, 2005. "Incentives and the Efficiency of Public Sector‐outsourcing Contracts," Journal of Economic Surveys, Wiley Blackwell, vol. 19(5), pages 767-787, December.
    17. Kirsten Foss & Nicolai J. Foss, 1999. "Understanding Ownership Residual Rights of Control and Appropriable Control Rights," DRUID Working Papers 99-4, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
    18. Martimort, David & Pouyet, Jérôme, 2006. "'Build It or Not': Normative and Positive Theories of Public-Private Partnerships," CEPR Discussion Papers 5610, C.E.P.R. Discussion Papers.
    19. Foss, Nicolai J. & Laursen, Keld, 2005. "Performance pay, delegation and multitasking under uncertainty and innovativeness: An empirical investigation," Journal of Economic Behavior & Organization, Elsevier, vol. 58(2), pages 246-276, October.
    20. Paul H. Jensen & Robin E. Stonecash, 2005. "Contract Efficiency in the Presence of Demand and Cost Uncertainty," Melbourne Institute Working Paper Series wp2005n01, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.

    More about this item

    Keywords

    Low-powered incentives; Organizational form; Contractability; General and specialized investment; Resource allocation; Resource creation;
    All these keywords.

    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:cpr:ceprdp:10432. 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: the person in charge (email available below). General contact details of provider: https://www.cepr.org .

    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.