[This paper studies a stylized model in which a division manager's historical cost reports are verified. In a one-period setting, the problem of tacit collusion between the verifier and the division manager is so severe that no mechanism can be constructed under which there is a unique equilibrium that has the verifier exercising anything other than the minimal level of care. However, by extending the contractual relationship to two periods, the tacit collusion problem can be resolved. A feature of the optimal collusion-preventing long-term contract is that it relies on history-contingent production decisions.]

[This paper studies information system design in a model of double moral hazard in which there is both a decision problem and a control problem. If either problem is considered in isolation, an information system that provides more public information is preferred. However, an information system that provides less public information can, in fact, be desirable because of an interaction between the two problems. The benefit of choosing an information system that provides less information is that it serves as a substitute for commitment for the principal. The cost is that neither the principal's decision (act) nor the agent's payments can be conditioned on the information. We provide sufficient conditions under which less information and more information are each optimal.]

We model two competing firms, each operating through their controlled subsidiaries while also holding a minority financial stake in their rival’s subsidiary. Under such cross-ownership, we derive the firms’ optimal disclosure policies, showing how they are affected by technological spillovers, competitive intensity, and the nature of product markets. The results demonstrate that cross-ownership induces more disclosures, benefiting the firm because disclosures promote the profit of its subsidiary (at low spillover values) or the rival’s subsidiary (at high spillover values). The increased transparency under cross-ownership can generate Pareto gains, improving consumer surplus and firm profits relative to separate ownership. This unifying finding holds under quantity and price competition, challenging the view that cross-ownership leads firms to collude, harming consumers. Additionally, with cross-ownership, high-spillover disclosures occur more under price than quantity competition. Thus, price competition can generate Pareto gains, contradicting the view that it favors consumers at the expense of firms.

Recent years have seen an increased emphasis on developing more precise accounting measures of market- and customer-level profitability. By their very nature, such segment profitability measures may unwittingly neglect complementarities. Such complementarities have been widely recognized on the demand side due to brand recognition, predatory pricing, or interdependent products. We develop a model showing that important supply-side complementarities can also be prevalent. In particular, when a firm relies on a self-interested supplier for inputs used across multiple segments, the wholesale price it pays depends on the average profitability of its segments. Taking such interaction between upstream pricing and the firm’s downstream reach into account, the model shows that: (1) segment profit calculations can understate or overstate the value added by the segment depending on the segment’s relative contribution margin, and (2) the firm sometimes benefits from devoting resources to less profitable segments and perhaps even from serving seemingly unprofitable markets and/or customers.

This paper examines the impact of distortions wrought by transfer pricing when a firm is engaged in both internal production and external procurement of inputs. In particular, we demonstrate that a firm can actually glean benefits from often-discussed transfer-pricing problems in dealing with an external supplier. Though transfer prices above marginal cost introduce inter-division coordination problems, they also introduce a lower willingness to pay to outside suppliers. Knowing that costly internal transfers will eat into demand, the supplier is more willing to set lower prices. Such supplier discounts can make decentralization worthwhile for the firm. This benefit of decentralization is shown to be robust to variations in both downstream and upstream competition.

Studies a stylized model in which a division manager's historical cost reports are verified. Verification in one-period setting; Full-information solution; Solution in the presence of unverified cost reports; Solution in the presence of verification; Verification in two-period setting; Role of historical information.

The once binary make-or-buy choice in firms’ sourcing has evolved in recent years into what is often a make-and-buy decision where the same input is both produced internally and procured externally. This paper presents a novel explanation for concurrent sourcing, one rooted in firms’ strategic positioning and intrinsically tied to their capacity choices. In our setting, a firm that chooses solely to make internally maximizes cost savings but prices away efficiency gains via intense retail competition. A firm that chooses solely to buy externally tempers competitive tendencies but finds input prices excessive. By choosing concurrent sourcing, a firm keeps average costs low (relying on external supply sparingly) while also credibly committing to reining in aggressive retail pricing due to the modestly higher marginal costs associated with outsourcing. This optimal middle ground is achieved by the firm strategically limiting its installed capacity.

Firm disclosures are observed by multiple audiences with diverse interests. Recognizing this practical feature, studies have examined how conflicting incentives provided by the multiple recipients of the information affect disclosure outcomes. Understandably, studies have not examined scenarios wherein disclosure incentives from recipients align in the same direction. With aligned incentives, disclosure incentives are presumably “additive.” This paper challenges such thinking. We model a firm that faces a potential entrant and a scrutinizing regulator so each individually incentivizes the firm to withhold favorable market news. However, we show that their joint presence can drastically change the disclosure equilibrium: the firm may voluntarily disclose good news seemingly in self-sabotage. Such disclosures attract entry, compelling the firm to yield its monopoly position. However, by ceding market power, the firm boosts consumer surplus and soothes regulatory concerns. The ensuing reduction in regulatory costs borne by the firm can then increase the firm’s overall value.

A firm's stock price may reveal information to a variety of participants, including its strategic partners and competitive rivals. This paper establishes that when a firm discloses cost information it can confound decision-relevant demand information embedded in the stock price that observers can otherwise extract. With stock price valuing firm profit (not cost and revenue separately), a disconnect is introduced between the firm's actions and its intent—it discloses more (less) on one dimension when its intent is to conceal (reveal) on another. Moreover, the firm's intent can be to either reveal or conceal information depending on what gives its partner the best competitive edge over its rival. Consequently, a firm's disclosure is made strategically, incorporating both valuation and competitive effects. Interestingly, the firm's disclosure strategy is designed in close concert with its production decision, i.e., the firm's optimal accounting and real decisions interact with each other for maximum impact.

The textbook make-or-buy decision is typically described as choosing the cheaper of the two sourcing options. However, research in accounting has consistently demonstrated that strategic and informational considerations often complicate such seemingly straightforward criteria. In a similar vein, this paper shows that when a firm becomes privy to accounting information pertaining to its profitability, its sourcing choice has powerful informational reverberations. This is because input procurement from an outsider serves to convey both profitability information and strategic positioning. Conveying profitability information refers to the fact that the size of the input order provides the supplier a credible signal of the firm's internal accounting information and, thus, its relative ability to compete in the marketplace. Conveying strategic positioning refers to the fact that the upfront placement of the input order also informs the supplier about the firm's chosen strategic choices in the marketplace. We demonstrate that both sources of information conveyance together can point to a firm preferring to buy inputs from a retail rival even when it can make them internally at a lower cost. This penchant for outsourcing to a rival is more pronounced the more accurate the firm's accounting system.