 Exit Option in Hierarchical AgencyDoyoung Kim, Jacques Lawarree and Dongsoo Shin (dshin@scu.edu) No 269, Econometric Society 2004 North American Winter Meetings from Econometric Society Abstract: We explain why organizations that limit the voice of their agents can benefit from granting them an exit option. We study a hierarchy with a principal, a productive supervisor and an agent. Communication is imperfect in that only the supervisor can communicate with the principal, while the agent has no direct voice to the principal. We show that the principal is better off if she grants the agent the option to walk away from the contract. By doing so, the principal is implicitly giving a “veto” power to the agent. This, in turn, restricts the manipulation of report by the supervisor. Thus, the exit option can be interpreted as a remedy for limits on communication. Our finding contrasts to the traditional result from the contract theory literature that the exit option reduces the principal’s welfare, while protecting the agent. Our result is robust to the case under collusion between the supervisor and the agent. We also examine the optimal size of the exit option Keywords: Exit option; voice; limited liability; collusion (search for similar items in EconPapers) There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:ecm:nawm04:269 Access Statistics for this paper More papers in Econometric Society 2004 North American Winter Meetings from Econometric Society Contact information at EDIRC. |
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