This dissertation studies the limitations of incentive design in organizations and how they lead to inefficient outcomes. Chapter 1 studies how a coalition coordinates its members when they freely join and leave. It characterizes the conditions under which such coordination prevents the coalition from forming in the first place. In the model, a coordinator recommends actions to the members after they form the coalition. Members can disobey the recommendation by leaving the coalition, but doing so requires them to forego some synergies. In equilibrium, the coordinator's recommendation keeps members from leaving the coalition, but it may induce actions that make some members worse off than had the coalition not formed at all. In this case, these members protect themselves by refusing to join the coalition in the first place. Building on this result, the chapter also studies how the coalition can implement richer decision-making processes—for instance, by delegating decision-making authority or requiring consensus decision-making—to convince members to join. Chapter 2 studies how incentives are affected by an agent's ability to worsen the quality of the performance measure that the principal uses. In the model, an agent sets up ways to manipulate performance before incentives are put in place. The principal designs a flatter incentive scheme when the agent manipulates more. This lowers the agent's rent extraction and deters him from manipulating too much. Better alignment of the performance measure with the principal's objective reduces this deterrence effect and results in more manipulation. Chapter 2 then explores a two-period setting, where setting up to manipulate the second-period incentive reduces the agent's first-period performance. To encourage first-period effort and discourage the set-up, the principal optimally “overloads” the first-period incentive. Chapter 3 studies the lemons problem in a delegation setting. A principal with private information about the returns to effort of a project chooses whether to delegate it to an agent. The principal optimally delegates only low-return projects. Therefore, the act of delegating becomes a negative signal to the agent. The agent is thus less willing to exert effort, so the principal optimally delegates even fewer projects. If the principal can commit to a set of projects to delegate, then she optimally delegates projects with a medium return.

Creator

• Yan, Ruozhou

DOI

• https://doi.org/10.21985/n2-f82d-g487

Subject

• Management
• Organization theory
• Economic theory

Language

• en

Alternate Identifier

• http://dissertations.umi.com/northwestern:16048
• etdadmin_upload_901237

Keyword

• Performance Manipulation
• Coalition Formation
• Coalition
• Delegation
• Incentives
• Organization

Date created

• 2022-01-01

Resource type

• Dissertation

Rights statement

• In Copyright