Performance Measurement, Compensation Schemes,and the Allocation of Interdependence Effects

Michael Krapp (), Wolfgang Schultze () and Andreas Weiler
Additional contact information
Michael Krapp: University of Augsburg, Faculty of Business Administration and Economics
Wolfgang Schultze: University of Augsburg, Faculty of Business Administration and Economics
Andreas Weiler: University of Augsburg, Faculty of Business Administration and Economics

A chapter in Operations Research Proceedings 2008, 2009, pp 15-20 from Springer

Abstract: Summary In practice, firms often exhibit divisionalized structures in which headquarters delegate decision rights to divisional managers. In this paper, we examine the problem of allocating interdependence effects stemming from interdivisional trade. For this, we analyze a model in which a divisionalized firm contracts with two managers to operate their divisions and to make relationship-specific investment decisions. Contracts can be based on both divisional profits and hence depend on the allocation of interdependence effects. In line with transfer pricing literature, we discuss a centralized as well as a decentralized setting with respect to the allocation authority. Issues of mechanism design concerning divisional trade are extensively discussed in the literature. Most related to our paper is [1] which shows that profit sharing induces managers to make first-best investment decisions in a decentralized setting. However, profit sharing imposes extra risk on the managers and therefore may not be optimal. Our paper extends the analysis of [1] by incorporating moral hazard problems with respect to investment decisions. Further, we distinguish between different organizational designs.

Keywords: Investment Decision; Central Management; Transfer Price; Nash Bargaining Solution; Centralize Setting (search for similar items in EconPapers)
Date: 2009
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-642-00142-0_3

Ordering information: This item can be ordered from
http://www.springer.com/9783642001420

DOI: 10.1007/978-3-642-00142-0_3

Access Statistics for this chapter

More chapters in Springer Books from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().