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The Value of Transparency in Multidivisional Firms

Author

Listed:
  • Salvatore Piccolo

    (Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore)

  • Emanuele Tarantino
  • Giovanni Ursino

    (Università Cattolica del Sacro Cuore
    Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore)

Abstract

We study internal incentives, transparency and rm 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 e orts are complements, while no communication is the only equilibrium outcome when efforts are substitutes.

Suggested Citation

  • Salvatore Piccolo & Emanuele Tarantino & Giovanni Ursino, 2015. "The Value of Transparency in Multidivisional Firms," DISCE - Working Papers del Dipartimento di Economia e Finanza def026, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    • Handle: RePEc:ctc:serie1:def026
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    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

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