Dongsoo Shin

Choice of Technology in Outsourcing: An Endogenous Information Structure

We study a monopsonist-supplier model in which each party has its own technology for production. The supplier may use its own or be required to adopt the buyers technology. Because the efficiency of each technology is unknown to the other party, the choice of technology determines the informed party. We find that using the buyers technology reduces not only the suppliers incentive to misrepresent, but sometimes the buyers as well. As a result, when equally efficient, the buyers technology is adopted. In cases where each technology has several states of efficiency, the less efficient technology may be assigned in the optimal contract.

Delegation and Dynamic Incentives

Using an agency model, we show how delegation, by generating additional private information, improves dynamic incentives under limited commitment. It circumvents ratchet effects and facilitates the revelation of persistent private information through two effects: a play-hardball effect, which mitigates an efficient agents ratchet incentive, and a carrot effect which reduces an inefficient agents take-the-money-and-run incentive. Although delegation entails a loss of control, it is optimal when uncertainty about operational efficiency is large. Moreover, delegation is more effective with production complementarity. We also consider different modes of commitment to yield insights into optimal organizational boundaries.

Upfront versus staged financing: the role of verifiability

We compare upfront and staged financing to see when and how one financing policy prevails over the other. In our model, there are two moral hazard problems that interact with each other. First, the entrepreneur may pursue his own private benefit out of the raised fund in the initial period. Second, the entrepreneur may shirk on project evaluation at the refinancing stage if the project is stage-financed. When the entrepreneurs effort for project evaluation is verifiable, the project may be stage-financed even if the cost of evaluating effort exceeds the value of information (over-evaluation). When such effort is unverifiable, the project may be financed upfront even if the value of information exceeds the cost of evaluating effort (under-evaluation).

Upstream Market Power and Wasteful Retailers

We provide a novel explanation for the wasteful product disposal by retailers. In our model, after purchasing a quantity of a product from the manufacturer, the retailer exerts a costly effort to sell the product to the final users. The manufacturer’s production cost and the outside opportunity associated with it is private information. We show that, when the manufacturer has the upstream market power, the retailer sells all units purchased from the manufacturer. However, when the retailer has the market power, it might deliberately purchase more than it sells to the final users (thus wasting the unsold amount).

Risk Taking as Self Discipline in Contractual Relationships

Abstract This paper considers an agency model in which the principal is privately informed of her production technology. In our model, the principal can require the agent to adopt the principal’s technology for production, or alternatively, to adopt a technology in the market. Information about the market technology’s efficiency is publicly available, and thus can be acquired. We show that, if the variation in technological efficiency is large, the principal prefers to delay acquisition of information about the market technology. The reason is that, the principal uses uncertainty as a device to provide a truth‐telling incentive to herself, which, in turn, lowers the cost of inducing the agent to accept the contract.

Gathering Information by a Partially Informed Agent

This paper considers an agency contracting with multiple tasks. The agent is privately informed on some tasks, but he must gather information on the other. We show that depending on the cost to gather information, task assignment is employed as an instrument to induce information gathering, or as an instrument to induce a truthful report.

Limited Communication and Responsibility Budgeting

We consider an agency model with three-tier hierarchy, in which the principal cannot observe the managers and the workers task environments. Communication is limited in that only the manager can report to the principal about the task environments. The principal decides whether or not to give the manager responsibility for project budgeting. Under responsibility budgeting, the manager receives all of the resources for the project tasks and shares those resources with the worker. Although the manager in such an arrangement has more direct sources of information rent, his rent-seeking incentive becomes weaker. This trade-off determines whether or not larger responsibility for budgeting is optimal.

Optimal Loyalty‐Based Management

We study an agency model in which an entrepreneur selects a manager from a candidate set. The selected managers effort improves the projects potential environment, and is a hidden action. The realized project environment is the entrepreneurs private information. A managers utility has two components — (i) loyalty, with which the manager values the organizations profit, and (ii) selfishness, with which the manager values the monetary transfer he receives from the entrepreneur. We find that if the managers task is easy enough, it is optimal to use a purely loyal manager. Otherwise, it can be optimal to use a manager with mixture of loyalty and selfishness — the managers mixed motivation alleviates the entrepreneurs misrepresenting incentive, and as a result, the output distortion in the optimal contract can be reduced. In addition, when it is optimal to use a manager with mixed motivations, the entrepreneur selects someone who is more selfish than loyal.

Granting an Exit Option to Conduct an Audit

We study a principal-agent relationship with auditing in which information from an audit is ‘soft’ - by conducting an audit, the principal observes the agents private information, but cannot obtain verifiable evidence on the information. Moreover, the principals auditing effort is unverifiable in our model. Therefore, besides the agents misreporting incentive, there is the principals incentive to accuse the truthful agent even without auditing. If the principals auditing effort is verifiable, granting no exit option to the agent is optimal although the principal can still accuse a truthful agent after the audit. We show that when the principals auditing effort is unverifiable, granting an exit option to the agent and auditing are complementary. Without granting an exit option to the agent, no auditing is optimal, and the principal grants an exit option to conduct a sincere audit, which in turn mitigates the agents misreporting incentive. Our analysis also reveals that, when the cost of auditing is sufficiently large, the principal conducts more sincere audits with a smaller amount of penalty.

Collusion and Outcome Equivalency

This paper considers a principal-agent model with adverse selection, in which collusion among the agents is possible. We compare the optimal outcome in two cases: (i) the principal can perfectly discriminate the transfers to the agents, and (ii) the principals power to discriminate the transfers to the agents is limited. We find that the principals payoff is not affected by limitation on transfer discrimination.