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Organizational Design with Non-Contractible Quality

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  • Seung Han Yoo

    (Department of Economics, Korea University, Seoul, Republic of Korea)

Abstract

When contracting with an agent who is a worker of non-contractible quality, a principal considers mechanisms with an informed third party, a manager. To induce the manager with limited liability to report worker quality truthfully, the principal devises the first-order alignment, an incentive alignment based on the first-order condition with an interval structure. We show that the mechanism of contracting simultaneously with the manager and the agent dominates the optimal ''selling the project'' mechanism at a low information cost. The interplay between information cost and limited liability results in three optimal organizational structures: simultaneous contracting (manager inside the firm), exante contracting (out-sourcing), or partial contracting (no manager). Lastly, we apply this model to explain what may cause the di?erence in the firm structure across three types of labor market.

Suggested Citation

  • Seung Han Yoo, 2016. "Organizational Design with Non-Contractible Quality," Discussion Paper Series 1604, Institute of Economic Research, Korea University.
    • Handle: RePEc:iek:wpaper:1604
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    References listed on IDEAS

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    Cited by:

    1. Seung Han Yoo, 2018. "Membership Mechanisms," Discussion Paper Series 1804, Institute of Economic Research, Korea University.
    2. Seung Han Yoo, 2017. "Optimal Design for an Informed Auctioneer," Discussion Paper Series 1702, Institute of Economic Research, Korea University.
    3. Seung Han Yoo, 2016. "Signaling with Two Correlated Characteristics," Discussion Paper Series 1605, Institute of Economic Research, Korea University.

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    More about this item

    Keywords

    Non-contractible quality; first-order alignment; boundary of the firm; information cost; limited liability;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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