Chapter 14 - Asymmetric information and organizational design. Chapter 14 considers the implications of asymmetric information - the case in which an agent on one side of a transaction has superior information to his counterpart on the other side. Asymmetric information presents a barrier to efficient transactions whether in markets or within firms. In turn, a firm’s organizational design aims to minimize the costs posed by asymmetric information. | Chapter Fourteen Asymmetric Information and Organizational Design I was to learn later in life that we tend to meet any new situation by reorganizing, and what a wonderful method it can be for creating the illusion of progress while producing confusion, inefficiency, and demoralization. ~Petronius Arbiter, 210 . For Discussion Incentive Pay at DuPont’s Fiber Division DuPont’s fiber division began an experiment in incentive pay of unprecedented scope for a company of its size. Asymmetric information Adverse Selection A Benefit’s Program A “Lemons” Market Signaling 4 Asymmetric information Principals, Agents, and Moral Hazard A Building Contract Health Insurance and Medical Expenditures Insuring Against Financial Failures The Financial Meltdown 5 Organizational Design The Nature of the Firm The Boundaries of the Firm Assigning Decision-Making Responsibilities Organizational Design Decentralization Airbus’s Dysfunctional Organization Coordination Through Teams Coordination Via | Chapter Fourteen Asymmetric Information and Organizational Design I was to learn later in life that we tend to meet any new situation by reorganizing, and what a wonderful method it can be for creating the illusion of progress while producing confusion, inefficiency, and demoralization. ~Petronius Arbiter, 210 . For Discussion Incentive Pay at DuPont’s Fiber Division DuPont’s fiber division began an experiment in incentive pay of unprecedented scope for a company of its size. Asymmetric information Adverse Selection A Benefit’s Program A “Lemons” Market Signaling 4 Asymmetric information Principals, Agents, and Moral Hazard A Building Contract Health Insurance and Medical Expenditures Insuring Against Financial Failures The Financial Meltdown 5 Organizational Design The Nature of the Firm The Boundaries of the Firm Assigning Decision-Making Responsibilities Organizational Design Decentralization Airbus’s Dysfunctional Organization Coordination Through Teams Coordination Via Transfer Prices DHL Worldwide Express Organizational Design Monitoring and Rewarding Performance Motivating Workers Integration or Franchising? Evaluating Individual Performance Organizational Design Monitoring and Rewarding Performance Information Technology and Organizational Structure Boundaries of the Firm Internal Information Sharing Organizational Design Separation of Ownership and Control in the Modern Corporation Limiting the Power of Top Management disclosure requirements external enforcement of managerial duties the market for corporate control Organizational Design Separation of Ownership and Control in the Modern Corporation (cont.) Shareholder empowerment Corporate governance reforms Organizational Design Separation of Ownership and Control in the Modern Corporation (cont.) Financial Incentives Business Behavior—Executive Compensation and Incentives Enron, Worldcom, and Tyco Incentive Pay at DuPont’s Fiber Division Revisited Appendix to Chapter 14 A PRINCIPLE-AGENT .
