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The value of transparency in multidivisional firms

Salvatore Piccolo (), Emanuele Tarantino and Giovanni Ursino

International Journal of Industrial Organization, 2015, vol. 41, issue C, 9-18

Abstract: We study internal incentives, transparency and firm performance in multidivisional organizations. Two independent divisions of the same firm design internal incentives, and decide whether to publicly disclose their performances. In each division a risk-neutral principal deals with a risk-averse (exclusive) agent under moral hazard. Each agent exerts an unverifiable effort that creates a spillover on the effort cost of the other agent. We first study the determinants of the optimal principal-agent contract with and without performance transparency. Then, we show how effort spillovers affect the equilibrium communication behavior of each division. Both principals commit to disclose the performance of their agents in equilibrium when efforts are complements, while no communication is the only equilibrium outcome when efforts are substitutes.

Keywords: Multidivisional firms; Transparency; Moral hazard (search for similar items in EconPapers)
JEL-codes: D43 D82 L14 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1016/j.ijindorg.2015.04.004

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