Anthony M. Marino

An incentive based theory of bank regulation

Abstract In this paper we analyze how depositors can employ both monitoring and capital requirements to control the risk of bank assets. We also analyze how monitors should be compensated if their actions are not directly observable and if there are binding limits on their liability. Second-best capital and monitoring levels (with unobservable actions) will be distorted away from their respective first-best levels. We derive some results about the nature of these distortions and characterize the optimal incentive scheme for monitors.

Myopic Investment Decisions and Competitive Labor Markets

This paper analyzes an agency problem where managers are able to control an unobservable variable that affects the time distribution of returns on a firms investments. Managers have an incentive to select myopic investments in order to convince the labor market that they have relatively high ability. The authors demonstrate that, if employment terms are determined in competitive labor markets and there are lower bounds on compensations, then, at the principals second-best contract, managers make a myopic investment choice. They also characterize the structure of the principals second-best contract and conduct comparative statics at this solution. Copyright 1994 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Internal competition for corporate resources and incentives in teams

Invoking the free-rider problem in teams, many observers find profit sharing in large organizations puzzling, because it should have negligible incentive effects. We show that if a firm can be decomposed into two separate teams whose outputs can be observed, then profit sharing combined with competition between these two teams for internal resources frequently solves the free-rider problem. Using this result, we endogenize the firms organizational structure and show that in the presence of economies of scale, small firms tend to organize as unitary firms, while large firms choose the multidivisional organizational form.

Decision Processes, Agency Problems, and Information: An Economic Analysis of Budget Procedures

Many organizations attempt to manage agency problems not with incentive contracts but by keeping the principal involved in the decision process, that is, by limiting delegation. This paper develops a model to investigate the economics of several decision processes that are commonly used to set budgets in both the public and private sector. The key tradeoff is that partial delegation allows the principal to reject those projects he dislikes, but causes the agent to distort the information he transmits to the principal.

Disobedience and Authority

This paper presents a theory of the allocation of authority in an organization in which centralization is limited by the agents ability to disobey the principal. We show that workers are given more authority when they are costly to replace or do not mind looking for another job, even if they have no better information than the principal. The allocation of authority thus depends on external market conditions as well as the information and agency problems emphasized in the literature. Evidence from a national survey of organizations shows that worker autonomy is related to separation costs as the theory predicts.

Incentive contracts for managers who discover and manage investment projects

We analyse how principals can select incentive contracts to induce managers to make optimal investment decisions when the managers privately observe information which is informative both about their own ability and about the value of projects. We show that there exist contracts based solely on actual returns which can implement the first-best investment decision and which entail no excess compensation to the managers. However, these contracts are unstable in competitive spot labor markets because of adverse selection. We demonstrate that the adverse selection problem can be remedied with a contract which involves precommitment of performance level by managers.

Regulation of Performance Standards versus Equipment Specification with Asymmetric Information

This paper compares the regulation of safety performance standards with the regulation of specific safety equipment. It is well known that if information is perfect, it is more efficient to regulate performance than to regulate specific equipment. The former mechanism fosters cost minimization, while the latter does not. I assume that the firm has more accurate knowledge of its safety production technology than does the regulator and show that under reasonable sufficiency conditions the regulation of equipment specifications is more efficient than the regulation of safety performance standards. I also extend these results to the case of environmental pollution regulation.

Delegation versus Veto in Organizational Games of Strategic Communication

In organizations, principals use decision rules to govern a more informed agents behavior. We compare two such rules: delegation and veto. Recent work suggests that delegation dominates veto unless the divergence in preferences between the principal and the agent is so large that informative communication cannot take place. We show that this result does not hold in a reasonable model of veto versus delegation. In this model, veto dominates delegation for any feasible divergence in preferences, if it induces the agent to shut down low quality proposals that he would otherwise implement and if such projects have sufficient likelihood.

A Model of Product Recalls with Asymmetric Information

This paper presents a model of involuntary product recall in which a firm has private information on its ability to produce safety. The ex post regulation of safety is motivated through a parametric imperfection in the product liability system which results in a firm under internalizing expected liability expenses. We treat the problem as one of mechanism design, where the regulator designs a recall procedure. This framework illuminates the point that recall is an interesting blend of ex ante and ex post regulation. We characterize a perfect recall procedure, contrast this with real world imperfect procedures, and study the interaction of the recall and the liability systems. Further, we analyze the interaction between optimal recall policy and product market structure.

Merger, Ease of Entry and Entry Deterrence in a Dynamic Model

We analyze whether ease and speed of entry can mitigate the anti-competititve effects of a merger, in a dynamic model of endogenous merger. In our model, if new firms can enter quickly, it is more likely that merger is motivated by efficiency as opposed to increased market power. Thus, there is less reason to challenge the merger. On the other hand, if entry of new firms becomes less costly, firms may have a stronger incentive to monopolize the industry through horizontal merger. We also show that when the incumbent can engage in entry deterrence activities, anti-merger policy can decrease welfare.