Theofanis Tsoulouhas

Integrator Contracts with Many Agents and Bankruptcy

This article analyzes optimal livestock production contracts between an integrator company and many independent growers in three similar industries: broiler, turkey, and swine. The analysis provides an explanation for the simultaneous existence of distinct incentive schemes in these industries by examining the effects of bankruptcy. The key factors are shown to be the output price volatility and the firm size. With large companies dominating the broiler industry, a small price volatility facilitates the use of two-part piece rate tournaments. By contrast, given the prevalence of smaller companies in the swine industry, a larger price volatility generates a bankruptcy risk which renders the use of tournaments infeasible. Given the combination of medium-size companies in the turkey industry, an intermediate price volatility produces a mixed result where tournaments and fixed performance standards exist simultaneously. Copyright 1999, Oxford University Press.

Gathering information before signing a contract with a privately informed principal

Abstract We show that precontractual gathering of information by the uninformed party in a transaction benefits the favorable types of the informed party by allowing them to separate from the unfavorable types. Complete separation of types can only occur if the informed party is able to revise her initial contract offer when the uninformed party detects an unfavorable type. Paradoxically, the uninformed party would benefit if the informed party was constrained to make a take-it-or-leave-it offer.

Do tournaments solve the two-sided moral hazard problem?

Abstract The paper analyzes the optimality of relative performance evaluation via two-part piece rate tournaments in incentive contracting with multiple agents and two-sided moral hazard. If the agents are risk-averse, it is shown that a tournament is optimal only when the following conditions hold: (i) there is common uncertainty inflicted on the activities of the agents that is not contingent on their actions, but can be contingent on the principal’s action; (ii) the principal sufficiently saves in transaction costs by employing a tournament; (iii) the number of agents is sufficiently large. Then the feedback effect of using a tournament to monitor the agents is that the principal’s moral hazard problem is relaxed when the principal takes a single action. It can also be relaxed when the principal can vary her actions with the agents but there are economies of scale in her activity. Absent common uncertainty, the optimum scheme is shown to be a fixed performance standard, rather than a tournament, but if the agents are risk-neutral, a tournament can still be optimal provided that (ii) and (iii) hold.

Tournaments With Ex Post Heterogeneous Agents

This paper compares relative performance evaluation via tournaments to absolute performance evaluation via piece rates when agents are heterogeneous ex post, to make the point that agent heterogeneity compromises the insurance function of tournaments. In particular, we show that the more heterogeneous agents are the less insurance can be offered through tournaments and the less dominant tournaments are over piece rates. Thus, absolute performance piece rates should be preferred when agents are highly heterogeneous. However, even with heterogeneous agents, tournaments become more desirable when the number of agents or the uncertainty about the common shock increases sufficiently.

Contests to Become CEO

Firms tend to promote insiders to the CEO position rather than to hire outsiders. This paper explains this phenomenon by developing a framework in which firms value the incentive that the contest to become CEO provides to current employees, but also want the most able candidate (insider or outsider) to become CEO. We determine the optimal payment to current employees, the payment to the new CEO if she is promoted from within, the payment to the new CEO if he is hired from outside, and the size of the handicap imposed on outside candidates (i.e., the bias toward insiders). We find that, at the optimum, outsiders must be clearly superior for the firm to facilitate their selection via negative handicapping (i.e., a bias towards outsiders). By contrast, if outsiders are not clearly superior, incentive provision to insiders via handicapping of outsiders or via higher payments to successful insiders is more important than selecting the most able CEO. We also find that the ability (or inability) of a firm to precommit to a large payment to a promoted insider CEO is critical. The ability to precommit reduces the handicap imposed on outsiders, raises the payment to insider CEOs, and lowers the payment to current employees. The outsider handicap, and so the likelihood that an insider will be chosen, depends positively on the number of insiders and the number of outsiders competing to be CEO, provided that the firm cannot precommit. The handicap imposed on outsiders can depend positively on the extent of commonality among insiders, provided that the firm wants to elicit effort from insiders but this effort is relatively small. The handicap depends negatively on the average ability of outsiders, the extent of commonality among insiders (provided that the firm wants to elicit effort from insiders and this effort is relatively large), the similarity of the shocks faced by insiders and outsiders, and financial stress faced by the firm.

Labor and credit contracts with asymmetric information and bankruptcy

Abstract This paper investigates the interaction between a firms contracts for labor and its contracts for credit under asymmetric information and limited liability, when workers are either always committed to their contract or they lack the power to commit ex post because arbitrage opportunities are available to them. The analysis contains two main results: First, contrary to the perceptions of the limited liability literature, where limited liability is thought of causing both underemployment and income underinsurance, limited liability is in fact shown to only cause underemployment. Existence of outside sources of credit eliminates the underinsurance side of the inefficiency, but can not eliminate underemployment. Second, the factor that does cause underinsurance is the existence of ex post arbitrage opportunities for the worker. Worker mobility leads to underinsurance regardless of whether limited liability is binding or not and even if outside sources of credit exist. Thus, underemployment stems from limited liability, and underinsurance stems from worker mobility.

Introduction to the Symposium on Tournaments, Contests, and Relative Performance Evaluation

The papers in this symposium reflect several of the directions taken by current research on tournaments, contests and relative performance evaluation. The papers help us understand the implications of agent heterogeneity on the incentives of agents to perform or self-select the offers designed for them. They encompass various issues such as career concerns and promotion incentives, interim disclosure of information obtained by the principal about agent performance, exposure to risk choices, and competing for talent.

Renegotiation‐proof Labour and Credit Contracts with Worker Mobility

This paper investigates the interaction between a privately informed firms contracts for labour and its contracts for credit. The analysis shows that if the worker has no ex post outside opportunities, or if the liquidation value of the firm is large, then the credit contract can always be state-independent: if the worker has outside opportunities and the liquidation value is small, then the credit contract must be state-dependent. However, if the worker is unable to precommit not to renegotiate with the firm, then the credit contract must be state-independent to ensure renegotiation-proofness and protect the interests of the creditor. This leads to credit rationing and under-investment. Copyright 1999 by The London School of Economics and Political Science

Performance Pay and Offshoring: Performance Pay and Offshoring

In this paper, we construct a North–South general equilibrium model of offshoring, highlighting the nexus among endogenous effort-based labor productivity and the structure of wages. Offshoring is modeled as international transfer of management practices and production techniques that allow Northern firms to design and implement performance compensation contracts. Performance–pay contracts address moral hazard issues stemming from production uncertainty and unobserved worker effort. We find that worker effort augments productivity and compensation of those workers assigned to more offshorable tasks. An increase in worker effort in the South, caused by a decline in offshoring costs, an increase in worker skill, or a decline in production uncertainty in the South, increases the range of offshored tasks and makes workers in the North and South better off. An increase in Southern labor force increases the range of offshored tasks, benefits workers in the North, and hurts workers in the South. International labor migration from low-wage South to high-wage North shrinks the range of offshored tasks, makes Northern workers worse off and Southern workers (emigrants and those left behind) better off. Higher worker effort in the North, caused by higher worker skills or lower degree of production uncertainty, decreases the range of offshored tasks and benefits workers in the North and South.

Performance Pay and Offshoring

In this paper, we construct a North-South general equilibrium model of offshoring, highlighting the nexus among endogenous effort-based labor productivity and the structure of wages. Offshoring is modeled as international transfer of management practices and production techniques that allow Northern firms to design and implement performance compensation contracts. Performance-pay contracts address moral hazard issues stemming from production uncertainty and unobserved worker effort. We find that worker effort augments productivity and compensation of those workers assigned to more offshorable tasks. An increase in worker effort in the South, caused by a decline in offshoring costs, an increase in worker skill or a decline in production uncertainty in the South, increases the range of offshored tasks and makes workers in the North and South better off. An increase in Southern labor force increases the range of offshored tasks, benefits workers in the North and hurts workers in the South. International labor migration from low-wage South to high-wage North shrinks the range of offshored tasks, makes Northern workers worse off and Southern workers (emigrants and those left behind) better off. Higher worker effort in the North, caused by higher worker skills or lower degree of production uncertainty, decreases the range of offshored tasks and benefits workers in the North and South.