Jose M. Plehn-Dujowich

An Agency Theoretic Formulation of Organizational Control Theory

We propose an analytical model that integrates two parallel independent streams of the literature, agency theory and organizational control theory. In doing so, we provide new insights into agency theory by introducing the concept of a congruent agent, and new insights into organizational control theory by using contracting tools to model behavior and outcome forms of controls. We study outcome-based control, i.e. contracting on the outcome; behavior-based control, i.e. contracting on a signal of effort; and clan control. To interpret clan control in the context of agency theory, we draw from experimental evidence in behavioral economics by distinguishing between two types of agents: a self-interested agent, who behaves in the traditional fashion; and a congruent agent, who cares about the principal’s payoff, which can be viewed as a form of “social” preferences in behavioral economics and a form of clan control resulting from “socialization” in organization theory. Corresponding to Ouchi’s (1979) view of organizational control, we derive analytical conditions under which outcome-based control with a self-interested agent, behavior-based control with a self-interested agent, and clan control with a congruent agent are optimal. We make the following contributions. First, we introduce to agency theory a new form of organizational control based on shared values and goals. Second, we provide new insights to organization theory by modeling the structure of the optimal compensation contracts corresponding to each form of control and the properties of the conditions under which each form of control is optimal as they relate to the characteristics of the agency relationship.

Determinants of Mode of Innovation in IT Firms

In the research, we investigate the role of diversification in the type of innovation strategy followed by incumbent firms in the IT industry. We setup a two-stage game theoretic model where, in the first stage, the incumbent decides whether to invest in R&D or acquire a pre-emptive stake in the entrant. In the second stage, the incumbent decides whether or not to acquire a successful entrant. Our main result is that a more diversified incumbent is more likely to invest in acquisition than engage in R&D. We also collect data on financial indicators for firms in the IT industry using the Compustat database to empirically test our main result. Our empirical model confirms our proposition that firms with a degree of diversification are more likely to innovate through acquisition than through R&D.

Screening Versus Sorting in a Principal-Agent Model with Moral Hazard and Adverse Selection

This paper proposes a principal-agent model of moral hazard and adverse selection that introduces the notion of screening, which is distinct from sorting; and distinguishes between ability that is privately known by the agent versus general ability that is observable by the principal and market. Sorting is the traditional process by which the adverse selection problem is resolved. Screening is the process we propose by which agents that are deemed to be unsuitable are rejected. Used in conjunction with sorting, we consider ex-ante screening on the basis of the (observable) measure of general ability; and ex-post screening on the basis of the private measure of ability. We identify the benefits and costs incurred by the principal associated with hiring an agent with superior ability, and derive the manner in which the compensation mechanism should be adjusted to take into account the roles of screening. The principal may prefer agents with inferior qualifications, rejecting those who are “overqualified”; conversely, she may select an agent with a distinguished pedigree, rejecting agents who are “underqualified”. Screening alters the relationship between the compensation mechanism and the characteristics of the agency relationship, causing established results to change, such as the negative link between risk and incentives. The empirical ramifications of screening are important: not controlling for screening introduces bias and inconsistency in estimation.