VGSF - WU Vienna - LC

Paolo Fulghieri, UNC Kenan-Flagler Business School

online via Zoom 17:30 - 18:45

Organizer VGSF

As part of the ser­ies of the "Fin­ance Re­search Sem­inar", VGSF wel­comes Paolo Fulgh­ieri from UNC Ken­an-­Fla­gler Busi­ness School to present his re­search pa­per.
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Un­cer­tainty, Con­tract­ing,  and Be­liefs in Or­gan­iz­a­tions

We ex­am­ine a mul­tidi­vi­sional firm with headquar­ters ex­posed to moral haz­ard by di­vi­sion man­agers un­der am­bi­gu­ity aver­sion. We show the ag­greg­a­tion and lin­ear­ity prop­er­ties of Holmström and Mil­grom (1987) hold un­der IID am­bi­gu­ity of Chen and Ep­stein (2002). Due to un­cer­tainty aver­sion, agents' be­liefs de­pend en­do­gen­ously on their ex­pos­ure to un­cer­tainty, either for their pos­i­tion in the or­gan­iz­a­tion (hi­er­arch­ical ex­pos­ure) or con­tracts (con­trac­tual ex­pos­ure). In­cent­ive con­tracts, by load­ing primar­ily on di­vi­sion cash-­flow, lead di­vi­sion man­agers to be more con­ser­vat­ive than headquar­ters, ag­grav­at­ing mor­al-haz­ard. By hedging un­cer­tainty, headquar­ters can design con­tracts that re­duce dis­agree­ment, lower in­cent­ive pro­vi­sion costs, and pro­mote ef­fort. Be­cause hedging un­cer­tainty can con­flict with hedging risk, op­timal con­tracts can dif­fer sub­stan­tially from those in stand­ard prin­cip­al-a­gent mod­els. Our model helps ex­plain the pre­val­ence of equity-­based in­cent­ive con­tracts and the rar­ity of re­l­at­ive-per­form­ance con­tracts.

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