Hideshi Itoh

INCENTIVES TO HELP IN MULTI-AGENT SITUATIONS

This paper concerns moral hazard problems in multiagent situations where cooperation is an issue. Each agent allocates effort to his own task and to other tasks as help. The principal may prefer an unambiguous division of labor by inducing each agent to specialize in his own task, or prefer teamwork where each agent is motivated to help other agents. A sufficient condition for teamwork to be optimal is presented. A nonconvexity of the optimal task structure is also shown: the principal wants either strict specialization or substantial teamwork. Copyright 1991 by The Econometric Society.

Job design, delegation and cooperation: A principal-agent analysis

Abstract This paper analyzes how tasks are assigned in organizations. Tasks can be allocated vertically between a principal and an agent, or laterally among agents. The resulting organizational job design determines how many tasks are delegated to agents, and how the agents tasks are divided among them. In the framework of the standard principal-agent relationship with moral hazard, it is shown that (i) an incentive consideration causes the principal to group a broad range of tasks into an agents job rather than hire multiple agents and make each of them specialize in just one task; and (ii) the principal may choose to delegate all the tasks in order to mitigate a conflicting incentive problem with agents.

Formal Contracts, Relational Contracts, and the Holdup Problem

We study the holdup problem in repeated transactions between a seller and a buyer such that the seller makes relation-specific investments in each period. We show that where, under spot transaction, formal contracts have no value because of the cooperative nature of investment, writing a simple fixed-price contract can be valuable under repeated transactions: There is a range of parameter values in which a higher investment can be implemented only if a formal price contract is written and combined with a relational contract. We also show that there are cases in which not writing a formal contract but entirely relying on a relational contract increases the total surplus of the buyer and the seller. The key condition is how the investment affects the renegotiation price in general, and the alternative-use value in particular.

Moral Hazard and Renegotiation with Multiple Agents

The purpose of the paper is to investigate contract renegotiation in multi-agent situations where risk averse agents negotiate a contract offer to the principal after they observed a common, unverifiable perfect signal about their actions. Renegotiation gives the agents gains from mutual insurance. Our main contribution is to show that renegotiation with multiple agents reduces the cost of implementing any implementable action pair down to the first-best level, even though the principal cannot observe the agents actions. An important implication is that decentralization, in the sense of delegated negotiation and proposals from the agents, can be as effective as centralization that utilizes revelation mechanisms in unrestricted ways.

Information processing capacities of the firm

Abstract We analyze the informational structure of a one-top and one-subordinate organization of the firm facing an uncertain environment. Before the realization of the true state, the top manager must choose the information processing capacity of the subordinate, which is an ability to discern the local aspect of the environment and depends upon the global aspect of the environment observed by the top manager. We examine how uncertainty in the environment affects the degree of specialization in the optimal capacity and the amount of knowledge resources in the firm, and discuss its implications for comparisons between Japanese management and American management. J. Japan. Int. Econ. , September 1987, 1 (3), pp. 299–326. Graduate School of Business, Stanford University, Stanford, CA 94305.

Corporate Restructuring in Japan Part I: Can M-Form Organization Manage Diverse Businesses?

The purpose of this paper is to examine the recent organizational restructuring in Japan in the framework of organizational economics, assuming that the product/market portfolio of the firm is fixed. How does a firm set about organizing its internal divisions? I first summarize some stylized facts on corporate diversification strategy and multi-divisional (M-form) organization in large Japanese firms from different perspectives. I then analyse the problem of choosing an organizational form. In particular, I argue that, precisely because of its related diversification, the multi-business Japanese firm adopting the M-form finds it difficult to differentiate its diverse businesses internally.

The Firm as a Legal Entity: What Distinguishes Wholly Owned Subsidiaries from Internal Divisions in Japan?

We argue that the legal boundaries of the firm have more substantial effects on the Japanese multi-business organization than on its U.S. counterpart. The standard economic, management, or legal view is that distinguishing between an in-house division and a subsidiary, in particular, a wholly owned subsidiary, does not make sense: Although it is the subsidiary who owns its assets, and the parent firm only owns the subsidiary as a legal thing, the parent firm, as the dominant shareholder, can hire or fire the subsidiarys managers at will, or even dissolve the subsidiary and sell off all the assets. However, subsidiary companies appear to have very different roles in the U.S. and Japan. Although the traditional approach to diversification in the U.S. is to organize businesses as divisions, most large Japanese firms maintain a network of affiliated firms many of which are subsidiaries, and the core firms actively separate activities from the main body, in part for the purpose of diversifying and developing new businesses. What then distinguishes a subsidiary from an in-house division? We argue that separating a business as a subsidiary has an economic impact on the firm that attempts to make a commitment in delegation of authority to some of the divisions but fails because of the multilateral nature of relationships between the head office of the firm and the in-house divisions. Although the ultimate control right resides with the head office of the firm, it may attain delegation of authority by making a credible promise to rubber-stamp the decisions made by the divisions in repeated relationships. Whether this informal delegation is sustained as an equilibrium depends on the strategies of the relevant parties. We argue that in the stylized Japanese firm, the managers identify themselves with the firm rather than the divisions they belong to, and hence everyone expects that deviation from informal delegation at a specific division will be met with punishment from all the divisions. If such a multilateral arrangement is well established and prevails in the Japanese firm, it faces difficulties in differentiating its internal units: either informal delegation granted to all the units or delegation to neither unit is sustainable as an equilibrium. This inflexibility makes room for a role of legal boundaries. Even if separating a unit as a subsidiary only changes its label, it enables the Japanese firm which cannot sustain partial informal delegation to distinguish among the businesses and attain informal delegation to those outside the boundaries while maintaining centralization internally.

Information Acquisition, Decision Making, and Implementation in Organizations

We study a decision process of a two-agent organization that consists of a decision-maker who selects a project and an implementer who implements and executes the selected project. Each of the decision-maker and the implementer has intrinsic and possibly divergent preferences over projects. Key features of the model are that (i) there is the separation of decision and implementation, and the implementer may choose to execute no project if the cost of implementation is high; and (ii) the implementer engages in both acquiring additional information and implementing the project. We show that the implementers incentives to gather information and to implement the selected project interact with each other in a non-trivial way. We in particular show how this interaction affects the optimality of diversity of preferences in organizations as well as the implementers strategic communication.

Decentralised Personnel Management

It is often said that the personnel management function is more centralised in Japanese firms than in their North American counterparts. For example, Aoki (1988, p. 51) describes the personnel department of the stylized Japanese firm (J-firm) as follows: