Relational Contracts and Organizational Capabilities

A large literature identifies unique organizational capabilities as a potent source of competitive advantage, yet our knowledge of why capabilities fail to diffuse more rapidly—particularly in situations in which competitors apparently have strong incentives to adopt them and a well-developed understanding of how they work—remains incomplete. In this paper we suggest that competitively significant capabilities often rest on managerial practices that in turn rely on relational contracts (i.e., informal agreements sustained by the shadow of the future). We argue that one of the reasons these practices may be difficult to copy is that effective relational contracts must solve the twin problems of credibility and clarity and that although credibility might, in principle, be instantly acquired, clarity may take time to develop and may interact with credibility in complex ways so that relational contracts may often be difficult to build

Fairness, envy, guilt and greed: building equity considerations into agency theory

In this article we examine the extent to which fairness considerations are salient to senior executives, and consider the implications for agency theory, tournament theory and the design of top-management incentives. We look for patterns in a unique data set of senior executive preferences and seek explanations for these patterns using a model of fairness first advanced by Fehr and Schmidt in 1999. We propose a number of amendments to Fehr and Schmidt’s model. We challenge some of the standard tenets of agency theory and tournament theory, demonstrating why equity considerations should be taken into account. We add to the growing literature on behavioural agency theory

Modelling long-distance route choice using mobile phone call detail record data: A case study of Senegal

The growing mobile phone penetration rates have led to the emergence of large-scale call detail records (CDRs) that could serve as a low-cost data source for travel behaviour modelling. However, to the best of our knowledge, there is no previous study evaluating the potential of CDR data in the context of route choice behaviour modelling. Being event-driven, the data are discontinuous and only able to yield partial trajectories, thus presenting serious challenges for route identification. This paper proposes techniques for inferring the users' chosen routes or subsets of their likely routes from partial CDR trajectories, as well as data fusion with external sources of information such as route costs, and then adapts the broad choice framework to the current modelling scenario. The model results show that CDR data can capture the expected travel behaviour and the derived values of travel time are found to be realistic for the study area

Inside Organizations: Pricing, Politics, and Path Dependence

When economists have considered organizations, much attention has focused on the boundary of the firm, rather than its internal structures and processes. In contrast, this review sketches three approaches to the economic theory of internal organization—one substantially developed, another rapidly emerging, and a third on the horizon. The first approach (pricing) applies Pigou's prescription: If markets get prices wrong, then the economist's job is to fix the prices. The second approach (politics) considers environments where important actions inside organizations simply cannot be priced, so power and control become central. Finally, the third approach (path dependence) complements the first two by shifting attention from the between variance to the within. That is, rather than asking how organizations confronting different circumstances should choose different structures and processes, the focus here is on how path dependence can cause persistent performance differences among seemingly similar enterprises

The consumer scam: an agency-theoretic approach

Despite the extensive body of literature that aims to explain the phenomenon of consumer scams, the structure of information in scam relationships remains relatively understudied. The purpose of this article is to develop an agency-theoretical approach to the study of information in perpetrator-victim interactions. Drawing a distinction between failures of observation and failures of judgement in the pre-contract phase, we introduce a typology and a set of propositions that explain the severity of adverse selection problems in three classes of scam relationships. Our analysis provides a novel, systematic explanation of the structure of information that facilitates scam victimisation, while also enabling critical scrutiny of a core assumption in agency theory regarding contract design. We highlight the role of scam perpetrators as agents who have access to private information and exercise considerable control over the terms and design of scam relationships. Focusing on the consumer scam context, we question a theoretical assumption, largely taken for granted in the agency literature, that contact design is necessarily in the purview of the uninformed principal

Revisiting consistency with random utility maximisation: theory and implications for practical work

While the paradigm of utility maximisation has formed the basis of the majority of applications in discrete choice modelling for over 40 years, its core assumptions have been questioned by work in both behavioural economics and mathematical psychology as well as more recently by developments in the RUM-oriented choice modelling community. This paper reviews the basic properties with a view to explaining the historical pre-eminence of utility maximisation and addresses the question of what departures from the paradigm may be necessary or wise in order to accommodate richer behavioural patterns. We find that many, though not all, of the behavioural traits discussed in the literature can be approximated sufficiently closely by a random utility framework, allowing analysts to retain the many advantages that such an approach possesses

Personal probabilities of probabilities

By definition, the subjective probability distribution of a random event is revealed by the (‘rational’) subject's choice between bets — a view expressed by F. Ramsey, B. De Finetti, L. J. Savage and traceable to E. Borel and, it can be argued, to T. Bayes. Since hypotheses are not observable events, no bet can be made, and paid off, on a hypothesis. The subjective probability distribution of hypotheses (or of a parameter, as in the current ‘Bayesian’ statistical literature) is therefore a figure of speech, an ‘as if’, justifiable in the limit. Given a long sequence of previous observations, the subjective posterior probabilities of events still to be observed are derived by using a mathematical expression that would approximate the subjective probability distribution of hypotheses, if these could be bet on. This position was taken by most, but not all, respondents to a ‘Round Robin’ initiated by J. Marschak after M. H. De-Groot's talk on Stopping Rules presented at the UCLA Interdisciplinary Colloquium on Mathematics in Behavioral Sciences. Other participants: K. Borch, H. Chernoif, R. Dorfman, W. Edwards, T. S. Ferguson, G. Graves, K. Miyasawa, P. Randolph, L. J. Savage, R. Schlaifer, R. L. Winkler. Attention is also drawn to K. Borch's article in this issue.Peer Reviewedhttp://deepblue.lib.umich.edu/bitstream/2027.42/43847/1/11238_2004_Article_BF00169102.pd

Measurement scheduling for recursive team estimation

We consider a decentralized LQG measurement scheduling problem in which every measurement is costly, no communication between observers is permitted, and the observers' estimation errors are coupled quadratically. This setup, motivated by considerations from organization theory, models measurement scheduling problems in which cost, bandwidth, or security constraints necessitate that estimates be decentralized, although their errors are coupled. We show that, unlike the centralized case, in the decentralized case the problem of optimizing the time integral of the measurement cost and the quadratic estimation error is fundamentally stochastic, and we characterize the ε-optimal open-loop schedules as chattering solutions of a deterministic Lagrange optimal control problem. Using a numerical example, we describe also how this deterministic optimal control problem can be solved by nonlinear programming.Peer Reviewedhttp://deepblue.lib.umich.edu/bitstream/2027.42/45246/1/10957_2005_Article_BF02275352.pd