We present a new methodology for studying the problem of intra-firm bargaining, based on the notion that contracts cannot commit the firm and its agents to wages and employment. We develop and analyse a general non-cooperative multilateral bargaining framework between the firm and its employees and consider outcomes which are immune to renegotiations by any party. Equilibrium firm profits are characterizable as both a weighted average of a neo-classical (non-bargaining) firm's profits and a generalization of Shapley value for a corresponding cooperative game. Furthermore, the resulting payoffs induce economically significant distortions in the firm's input and organizational-design decisions.

This paper examines individual decision making when decisions reflect on people's ability to learn. The authors address this problem in the context of a manager making investment decisions on a project over time. They show that, in an effort to appear as a fast learner, the manager will exaggerate his own information but ultimately he becomes too conservative, being unwilling to change his investments on the basis of new information. The authors' results arise purely from learning about competence rather than concavity or convexity of the rewards functions. They relate their results to the existing psychology literature concerning cognitive dissonance reduction. Copyright 1996 by University of Chicago Press.

This paper examines individual decision making when decisions reflect on people's ability to learn. We address this problem in the context of a manager making investment decisions on a project over time. We show that in an effort to appear as a fast learner, the manager will exaggerate his own information; but ultimately, he becomes too conservative, being unwilling to change his investments on the basis of new information. Our results arise purely from learning about competence rather than concavity or convexity of the rewards functions. We relate our results to the existing psychology literature concerning cognitive dissonance reduction.

Organizational Design and Technology Choice under Intrafirm Bargaining: Reply by Lars A. Stole and Jeffrey Zwiebel. Published in volume 93, issue 1, pages 456-457 of American Economic Review, March 2003

We consider a wide number of applications of an intrafirm bargaining game within organizations where employees and the firm engage in wage negotiations. Under our presumption that contracts cannot bind employees to the organization, the resulting stable wage and profit profiles give rise to an objective function for the firm that places weight on inframarginal profits in an economically significant manner. We in turn employ this methodology to explore applications of organizational design, hiring and capital decisions, training and cross-training, the importance of labor and asset specificity, managerial hierarchies, preferences for unionization, responses to competition, and internal capital budgeting.

The authors examine managerial investment decisions in the presence of imperfect information and short-term managerial objectives. Prior research has argued that such an environment induces managers to underinvest in long-run projects. The authors show that short-term objectives and imperfect information may also lead to overinvestment and they identify how the direction of the distortion depends upon the type of informational imperfection present. When investors cannot observe the level of investment in the long-run project, suboptimal investment will be induced. When investors can observe investment but not its productivity, however, overinvestment will occur.

ABSTRACT We examine managerial investment decisions in the presence of imperfect information and short‐term managerial objectives. Prior research has argued that such an environment induces managers to underinvest in long‐run projects. We show that short‐term objectives and imperfect information may also lead to overinvestment, and we identify how the direction of the distortion depends upon the type of informational imperfection present. When investors cannot observe the level of investment in the long‐run project, suboptimal investment will be induced. When investors can observe investment but not its productivity, however, overinvestment will occur.

We present a Theory of Contracts under costly enforcement in the context of a dynamic relationship between an uninformed buyer and a seller who is privately informed on his persistent cost at the outset. Public enforcement relies on remedies for breach. Private enforcement comes from severing relationships. We first characterize aggregate enforcement constraints ensuring that trading partners do not breach contracts unduly. Whether a long-term contract is enforceable does not depend on the distribution of penalties for breach between the buyer and the seller. While under complete information, the optimal contract would remain stationary, non-stationarity might arise under asymmetric information. Enforcement constraints are time-dependent and easier to satisfy as time passes. Indeed, a high-cost seller may be tempted to trade high volumes at high prices at the beginning of the relationship before breaching the contract later on. Yet, such take-the-money-and-run strategy becomes less attractive as time passes and can be prevented with back loaded payments. The optimal contract thus goes through two different phases. First, quantities and prices increase at the inception of the relationship. Later on, the contract looks more stationary. Long-run screening distortions encapsulate the quality of enforcement, offering de facto a link between the quality of the legal system and contractual performances. / Nous présentons une théorie des contrats avec exécution coûteuse dans le contexte d'une relation dynamique entre un acheteur non informé et un vendeur avec information privée quant à son coût persistant au départ. L’exécution publique des contrats s'appuie sur les recours pour violation. L’exécution privée consiste à de rompre les relations. En premier lieu, nous caractérisons les contraintes d'exécution globale. La possible exécution d’un contrat à long terme ne dépend pas de la distribution des pénalités pour rupture entre l'acheteur et le vendeur. Sous information complète, le contrat optimal resterait stationnaire, alors qu’il pourrait être non stationnaire lorsque l'information est asymétrique. Les contraintes de l'application dépendent du temps et sont plus faciles à satisfaire à mesure que le temps passe. En effet, un vendeur avec des coûts élevés peut être tenté d'échanger de grandes quantités à des prix élevés au début de la relation avant de rompre le contrat par la suite. Pourtant, telle stratégie, prendre l’argent et courir, devient moins attrayante à mesure que le temps passe et peut être évitée. Le contrat optimal passe donc par deux phases différentes. Tout d'abord, les quantités et les prix augmentent lors de la création de la relation. Plus tard, on le contrat semble plus stable. Les distorsions dues au dépistage de long terme signalent, ce qui suggère de facto un lien entre la qualité du système légal et les performances contractuelles.

The canonical selection contracting programme takes the agent's participation decision as deterministic and finds the optimal contract, typically satisfying this constraint for the worst type. Upon weakening this assumption of known reservation values by introducing independent randomness into the agents' outside options, we find that some of the received wisdom from mechanism design and nonlinear pricing is not robust and the richer model which allows for stochastic participation affords a more general empirical specification. We develop a multidimensional methodology for addressing this class of problems, providing two important applications to nonlinear pricing. First, with nonlinear pricing by a monopolist the familiar “nodistortion-at-the-top” result persists, but in tandem with the surprising conclusion that there is either no distortion at the bottom or bunching. Second, in a simple model of product differentiated duopolists competing with nonlinear pricing we show that, generally, the duopoly outcome is qualitatively similar to the monopoly outcome. However, when marginal costs are symmetric and competition is sufficiently intense, distortions disappear and the equilibrium outcome takes a remarkably simple form: efficient quality allocations with cost-plus-fee pricing.