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Organizational Design with Non-Contractible Quality

Seung Han Yoo

No 1604, Discussion Paper Series from Institute of Economic Research, Korea University

Abstract: When contracting with an agent who is a worker of non-contractible quality, a principal considers mechanisms with an informed third party, a manager. To induce the manager with limited liability to report worker quality truthfully, the principal devises the first-order alignment, an incentive alignment based on the first-order condition with an interval structure. We show that the mechanism of contracting simultaneously with the manager and the agent dominates the optimal ''selling the project'' mechanism at a low information cost. The interplay between information cost and limited liability results in three optimal organizational structures: simultaneous contracting (manager inside the firm), exante contracting (out-sourcing), or partial contracting (no manager). Lastly, we apply this model to explain what may cause the di?erence in the firm structure across three types of labor market.

Keywords: Non-contractible quality; first-order alignment; boundary of the firm; information cost; limited liability (search for similar items in EconPapers)
JEL-codes: D21 D82 D86 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-cta, nep-gth, nep-hpe, nep-mic and nep-ore
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Citations: View citations in EconPapers (3)

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