Knowledge that Transforms

How can boards be chosen through a process partially controlled by the CEO, yet, in many instances, still be effective monitors of him? We offer an answer based on a model in which board effectiveness is a function of its independence. This, in turn, is a function of negotiations (implicit or explicit) between existing directors and the CEO over who will fill vacancies on the board. The CEO's bargaining power over the board-selection process comes from his perceived ability relative to potential successors. Many empirical findings about board structure and performance arise as equilibrium phenomena of this model.

A theoretical and computational model with tax-financed, tuition-free public schools and competitive, tuition-financed private schools is developed. Students differ by ability and income. Achievement depends on own ability and on peers' abilities. Equilibrium has a strict hierarchy of school qualities and two-dimensional student sorting with stratification by ability and income. In private schools, high-ability, low-income students receive tuition discounts, while low-ability, high-income students pay tuition premia. Tuition vouchers increase the relative size of the private sector and the extent of student sorting, and benefit high-ability students relative to low-ability students