This paper reconciles three pronounced trends in U.S. corporate governance: the increase in pay levels for top executives, the increasing prevalence of appointing CEOs through external hiring rather than internal promotions, and the increased prevalence of hiring outside CEOs with prior...

This paper identifies a new type of cost associated with centralization. If workers are liquidity constrained, it may be less costly to motivate a worker who is allowed to work on his own idea than a worker who is forced to follow the manager's idea. Thus, it may be optimal to let workers decide...

This paper examines the efficiency of the outside labor market in inducing optimal managerial behavior in the presence of learning. It shows that the incentives provided by the market can be more efficient than the original analysis of Holmstrom (1982) would suggest. Moreover, under a mild...

Profit-maximizing owners of firms may find it optimal to provide managers with incentives to maximize sales in addition to profits. This influences the outcome of the bargaining game between workers and managers over workers' wages and helps to solve the problem of underinvestment by workers in...

We study an organization, consisting of a manager and a worker, whose success depends on its ability to estimate a payoff-relevant but unknown parameter. If the manager has private information about this parameter, she has an incentive to conceal it from the worker in order to motivate him to...

This paper provides a simple theoretical model of trade secrets in hierarchical firms. A crucial assumption is that each manager has access to trade secrets pertaining to his own hierarchical level as well as to all lower levels. The paper explores some implications of this assumption for the...

This paper presents a theory of the allocation of authority in an organization in which centralization is limited by the agent's ability to disobey the principal. We show that workers are given more authority when they are costly to replace or do not mind looking for another job, even if they...

Standard models of team production imply that, due to the free rider problem, profit sharing tends to have negligible incentive effects in large organizations. Many observers therefore find the use of profit sharing in large firms puzzling. In this paper we show that if a firm can be decomposed...

This paper studies how promotion tournaments motivate workers to accumulate human capital when wages are constrained by outside labor markets. Patient firms can retain some control over tournament prizes through a relational contract, but if the firms are competitive, full efficiency does not...

This paper examines the efficiency of the outside labor market in inducing optimal managerial behavior in the presence of learning. It shows that the incentives provided by the market can be more efficient than the original analysis of Holmstrom (1982) would suggest. Moreover, under a mild...