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Full-Text Articles in Industrial Organization
Optimal Debt With Unobservable Investments, Michael Raith, Paul Povel
Optimal Debt With Unobservable Investments, Michael Raith, Paul Povel
Michael Raith
We study financial contracting when both an entrepreneur’s investment and the resulting revenue are unobservable to an outside investor.We show that a debt contract is always optimal; repayment is induced by a liquidation threat that increases with the extent of default. Moreover, when the entrepreneur’s decision concerns the scale of his project, a contract that minimizes liquidation losses is optimal. When the decision concerns managerial effort or project risk, however, it may be optimal to write a contract with a greater threat of liquidation, to induce the entrepreneur to exert more effort or to choose a less risky project.
Abuse Of Authority And Hierarchical Communication, Guido Friebel, Michael Raith
Abuse Of Authority And Hierarchical Communication, Guido Friebel, Michael Raith
Michael Raith
If managers and their subordinates have the same basic qualifications, organizations can benefit from replacing unproductive superiors with more productive subordinates. This threat may induce superiors to deliberately recruit unproductive subordinates, or abuse their personnel authority in other ways, to protect themselves. We show that requiring intrafirm communication to pass through a “chain of command” can be an effective way to provide superiors with an incentive to recruit the best possible subordinates.We discuss alternative ways to prevent the abuse of authority and general implications of our analysis for organizational design. We also present supporting evidence from the literature on human …
Financial Constraints And Product Market Competition: Ex-Ante Vs. Ex-Post Incentives, Michael Raith, Paul Povel
Financial Constraints And Product Market Competition: Ex-Ante Vs. Ex-Post Incentives, Michael Raith, Paul Povel
Michael Raith
This paper analyzes the interaction of financing and output market decisions in a duopoly in which one firm is financially constrained and can borrow funds to finance production costs. Two ideas have been separately analyzed in previous work: Some authors argue that debt strategically affects a firm’s output market decisions, typically making it more aggressive; others argue that the threat of bankruptcy makes debt financing costly, typically making a firm less aggressive. Our model integrates both ideas; moreover, unlike most previous work, we derive debt as an optimal contract. Compared with a situation in which both firms are unconstrained, the …