The Effectiveness of Alternative Programs of Management by Objectives on Firm Performance: An Experimental Study. (Draft Paper)

The research focuses on the use of laboratory experimentation in order to design an effective MBO program for the executives of an italian electric utility corporation (Enel). A game theoretical formulation of the MBO program currently adopted by Enel is given (baseline model) and laboratory experiments are implemented to test (a) how experimental subjects behave within the stylized MBO program and (b) the relative effectiveness on subjects performance of the introduction of two different institutions (liability and tournament rules). Results highlight that: 1) the baseline model resembles what has been observed in Enel: targets negotiated between principals and agents are easy to fulfill and a large majority of executives reach the MBO prize. 2) Liability rules increase the bargaining position of principals and result overall in higher levels of target assigned to agents and higher levels of performance of them; conversely no savings are observed in terms of cost of the MBO program. 3) Tournament rules allow to save more in MBO program costs; on the other side performance are, on average, similar to the baseline and variance is higher since the population splits into two sub-groups where a majority of agents shows performance levels close to the case of the liability rule while a minority of them shirk and decrease their working effort until the minimal performance. Some indications on the use of laboratory experimentation as a tool of organization design are finally suggested.