Control Over The Allocation And Contractual Mechanisms

The thesis focuses on the allocation of authority in the firm. The allocation ofauthority is an contract arrangement, which may reduce the transaction cost in thefirm. The contemporary economics began to pay more attention to the research ofauthority in the organization and try to find the way to enhance the performance oforganization through the research. The authority depends on the ownership for itsexistence, which means the stockholder of the company owns the authority and coulddetermine the allocation of authority. The current situation for the firm is theseparation of ownership and authority, and the managers have the authority.The authority in an firm is transferable and could be allocated between the leaderand the subordinate. An important question bothering economist is: What kinds offactors determine the organizations' forms? Or under what conditions the companywill choose centralization or decentralization? Our research shows that theorganization's efficiency depends on the match between the authority and theknowledge (or information), and the interests' conflict between the principal and theagent will influence to some degree the allocation of authority and the efficiency touse it. The allocation of authority depends on the information advantage of theprincipal and the agent. When the interests' conflict is within certain limit, theprincipal will transfer the authority to the agent with the information advantage. Butwhen the interest conflict is serious, the principal won't allocate the authority to theagent. The empirical evidence also proved that the allocation of authority in the SOEsincreased the economic efficiency, but the manager with the information advantagedidn't completely own the authority and then couldn't make an prompt decision underurgent conditions. On the other hand, the government appoints the manager, whichwill influence the interest of the manager. The information release and preference bythe manager also depends on the comparison between the "political interest" and theshareholders' interest. The decision made by the manager benefit the one that has littleinterest divergence with him.The second issue is how to allocate the authority to motivate the agent releaseprivate information? What factors will influence the delegation? How does theallocation affect the information release in an organization? There are two ways toallocate authority to the agent, one is the rank-order tournament's form and the otheris the committee's form.. Interest conflict will influence the information release by the agents. The inequitability of the decision rule made by the principal will intensify theinterests' conflict between the principal and the agent, and then block the informationrelease. The agent will form his reputation during the continuous rank-ordertournament that will increase the probability for the agent to get the authority, but thereputation will make the agent conservative. The agent could make the decision that isnot aligned with the interest of the principal, and then will reduce the probability ofdelegation. The skip-level communication between the low level and the top level willintensify the interest conflict between the employee and the manager, particularlywhen it could help deprive the manager of the authority. A possible solution is tochange the purpose to use the skip-level communication in an organization.Comparing with the rank-order tournament, the information in the committee will notbe provided enough because of free-rider's existence.The third issue is based on the previous two and recognizes that there existsopportunism in the organization and opportunism by the agent will cause thetransaction cost. A possible method to overcome the opportunism is to make a reliablecontract. An important question is: how does the commitment influence the allocationof authority in an organization? The principal could utilize the contract tool and signdifferent contract with different agents to increase the efficiency of the authority. Thecommitment value will delay the information release of the agent. We also use twoempirical evidences to prove our theoretical result.The fourth issue has developed our research scope from the single decision taskto the multiple decision tasks. When facing multiple tasks, the organization needs tocoordinate the possible conflicts. Different forms of the allocation of the authority arealso the different coordination structures. There are three coordination structures:centralization, decentralization and fully distributed coordination. Under thecentralized coordination structure, the principal will coordinate the different decisiontasks based on the report by the agent. Under the decentralized coordination structure,the agent could make the decision individually based on the information collected byhimself and his local knowledge. Under the fully distributed coordination structure,the agent could make the decision individually based on the information collected byhimself and others and his local knowledge. Our question is: what kinds of role do thethree coordination structures play in coordinating different tasks? Which one is better?When the organization facing many decision tasks, the decentralization dominates thecentralization; when the organization facing not too many decision tasks, the fully distribution coordination is better than the decentralization. Then we introduce theM-form and U-form organization and analyze their coordination roles, our researchshows that M-form organization is suitable for dealing with the complex decisiontasks because of its' flexibility, while the U-form organization is suitable for dealingwith the economy-scale decision tasks because of its' specialization advantage.