Raaj K. Sah, Joseph E. Stiglitz; The Quality of Managers in Centralized Versus Decentralized Organizations*, The Quarterly Journal of Economics, Volume 106, Iss

An overlapping generations model incorporating returns to specific experience is used to demonstrate how three salient phenomena in land-scarce developing countries—the predominance of intergenerational family extension, cost advantages of family relative to hired labor, and the scarcity of land sales—may be manifestations of an optimal implicit contract between generations that maximizes the gains from farm-specific, experientially obtained knowledge. A method for estimating the contribution to agricultural profits of the farm experience embodies in elderly kin based on a three-year panel of household data from India is proposed and implemented. Implications of the theory for market transactions in land and for family extension are also tested using individual farm data and time-series information on rainfall. Why is the aged husbandman more skillful in his calling than the younger beginner, but because there is a certain uniformity in the operation of the sun, rain, and earth, towards the production of vegetables; and experience teaches the old practitioner the rules, by which this operation is governed and directed? David Hume [1758, p. 106]

Relational contracts—informal agreements sustained by the value of future relationships—are prevalent within and between firms. We develop repeated-game models showing why and how relational contracts within firms (vertical integration) differ from those between (nonintegration). We show that integration affects the parties' temptations to renege on a given relational contract, and hence affects the best relational contract the parties can sustain. In this sense, the integration decision can be an instrument in the service of the parties' relationship. Our approach also has implications for joint ventures, alliances, and networks, and for the role of management within and between firms.

Incentive contracts often include important subjective components that mitigate incentive distortions caused by imperfect objective measures. This paper explores the combined use of subjective and objective performance measures in (respectively) implicit and explicit incentive contracts. We show that the presence of sufficiently effective explicit contracts can render all implicit contracts infeasible, even those that would otherwise yield the first-best. We also show, however, that in some circumstances objective and subjective measures are complements: neither an explicit nor an implicit contract alone yields positive profit, but an appropriate combination of the two does. Finally, we consider subjective weights on objective measures.