This paper examines the characteristics of incentive contracts in which the agent's payoff is not based on the principal's objective. The author shows that contracts based on such performance measures will not, in general, provide first-best incentives, even when the agent is risk neutral. The form of the optimal contract and the efficiency of this contract depend on the relationship between the performance measure used and the principal's objective. The model provides a simple and intuitive statistical measure. Applications to various incentive contracting situations, including the "gaming" of performance measures, the use of revenue-based sales commissions, and relative performance evaluation, are presented. Copyright 1992 by University of Chicago Press.

This paper examines the characteristics of incentive contracts in which the agent's payoff is not based on the principal's objective. I show that contracts based on such performance measures will not in general provide first-best incentives, even when the agent is risk neutral. The form of the optimal contract and the efficiency of this contract depend on the relationship between the performance measure used and the principal's objective. The model provides a simple and intuitive statistical measure that serves as a metric for the efficiency of a performance measure. Applications to various incentive contracting situations, including the "gaming" of performance measures, the use of revenue-based sales commissions, and relative performance evaluation, are presented.

This paper chronicles the history of the Beatrice company from its founding in 1891 as a small creamery, through its growth by acquisition into a diversified consumer and industrial products firm, and its subsequent leveraged buyout and sell-off. The paper analyzes the value consequences the firm's acquisition and divestiture policies, its organizational strategy, and its governance. The analysis sheds light on a number of issues in organization theory, strategy, and corporate finance, including the sources of value in diversifying aquisitions, the cost of over-centralization and weak corporate governance, and the mechanisms of value creation in the market for corporate control.

ABSTRACT This paper chronicles the history of the Beatrice company from its founding in 1891 as a small creamery, through its growth by acquisition into a diversified consumer and industrial products firm, and its subsequent leveraged buyout and sell‐off. The paper analyzes the value consequences the firm's acquisition and divestiture policies, its organizational strategy, and its governance. The analysis sheds light on a number of issues in organization theory, strategy, and corporate finance, including the sources of value in diversifying aquisitions, the cost of over‐centralization and weak corporate governance, and the mechanisms of value creation in the market for corporate control.

This paper chronicles the history of the Beatrice company from its founding in 1891 as a small creamery, through its growth by acquisition into a diversified consumer and industrial products firm, and its subsequent leveraged buyout and sell-off. The paper analyzes the value consequences and firm's acquisition and divestiture policies, its organizational strategy, and its governance. The analysis sheds light on a number of issues in organization theory, strategy, and corporate finance, including the sources of value in diversifying acquisitions, the cost of overcentralization and weak corporate governance, and the mechanisms of value creation in the market for corporate control.

That firms employ internal labor markets, in which wages and careers are partly shielded from the vagaries of external labor markets, seems well accepted. Yet, Peter Doeringer and Michael Piore's (1985) seminal work on internal labor markets has had a rather limited impact on the economics profession. In contrast to textbooks on human-resource management, which have adopted their paradigm wholeheartedly, labor economics texts tend to pay only cursory attention to internal labor markets. The competitive model, in which wages reflect an individual's marginal product, remains the paradigm of choice. There are many reasons for this lackluster reception, including intellectual convenience. A more acceptable excuse is that while Doeringer and Piore's study, which was based on interviews with 75 companies, identified several key regularities (ports of entry, career ladders, etc.) that have come to shape our perception of internal labor markets, the book never presented a theory to explain these findings. With the advent of information economics and contract theory, models of internal labor markets-or at least selected features of these markets-have begun to emerge. The objective of these theories is to show that internal-labor-market outcomes can be construed as second-best solutions to contracting problems under incomplete information. For instance, tournament theory (Edward Lazear and Sherwin Rosen, 1981) sees the attachment of wages to jobs as part of an efficient incentive scheme. Michael Waldman (1984) explains the same phenomenon as an insurance arrangement against variations in individual productivity. Seniority rules in promotion and wagesetting can be understood as responses to problems of collusion or influence activities (Paul Milgrom and John Roberts, 1988). The list could be extended. At this point, there is hardly any feature of internal labor markets that cannot be given some logical explanation using the right combination of uncertainty, asymmetric information and opportunism. Doeringer and Piore (1985), in the preface to the second printing of their book, take exception with this line of theoretical research. They believe that internal labor markets are inherently a social (group) phenomenon and that something fundamental is missed by pursuing individualistic models. Be that as it may, we think there is another, more serious problem with the direction that this research has taken: too much of it relies on the old empirical stereotype. The original study was done 25 years ago and focused almost exclusively on blue-collar, male, unionized, manufacturing workers. One might rightly wonder how relevant these findings are in today's environment and whether they extend to white-collar work as most discussions seem to assume. Before proceeding with the theory, it is prudent to ask: do we have the facts right? In this paper we report on two recent case studies of individual firms that use personnel records to analyze wage and career paths of managerial workers: Lazear (1992) and Baker et al. (1994a,b).1 Person-

We develop a model that clarifies how to measure CEO incentive strength and how to reconcile the enormous differences in pay sensitivities between executives in large and small firms. The crucial parameter is shown to be the elasticity of CEO productivity with respect to firm size. We find that CEO marginal products rise significantly with firm size (confirming Rosen's conjecture that CEOs of large firms have a "chain letter" effect on firm performance), and overall CEO incentives are roughly constant, or decline slightly, with firm size. We employ a multitask model to discuss implications for the design of control systems.