[Firms' investment practices often seem to be suboptimal; for example, they may ration capital or underinvest in risky projects. Recent research (e.g., Antle and Eppen 1985, Antle and Fellingham 1990, Harris et al. 1982) argues that these practices might be optimal responses to contracting frictions that arise from information asymmetry among the members of the firm. Analyzing a two-person firm, these studies endow the manager with pre-decision information about the returns from a given project and examine the owner's optimal response to the information asymmetry. This article expands the problem in two ways. First, it considers the choice between two competing projects. Second, it explicates the source of the manager's information superiority: proximity to the firm's operations advantage the manager in both acquiring and knowing the cost-benefit of additional information pertinent to project choice. Because of the manager's advantage, the owner cannot infer why the project was selected. The owner's response to the information asymmetry must optimize over both the information-acquisition and resource-allocation decisions. This article considers a model in which the manager must choose between a risk-free and a risky project. The owner delegates project selection because of the manager's pre-contract information superiority and because only the manager can obtain post-contract additional, costly information. Delegating project choice, however, creates a coordination problem because of the owner's inability to observe whether the manager expended effort on information search and because the value of additional information depends on the manager's pre-contract information (i.e., on the manager's type). Using the observed variables (project choice and realized profit), the optimal contract must (1) motivate a subset of manager types to select the project after expending effort on information search, and (2) motivate the complementary set to condition project selection on their pre-contract information alone. The model considered here is related to that of Demski and Sappington (1987) which considers issues involved in contracting with an "expert" who is uniquely qualified to acquire pertinent information, and Lambert (1986) applying this concept to a project-selection setting. Pre-contract asymmetry about the value of search is the crucial difference between previous research and this study. Absent information asymmetry (in the first-best solution), the information-acquisition problem is separable from the resource-allocation problem. The owner asks for search only from those manager types for whom the value to search exceeds cost. (The set of such manager types is convex because the value to search is concave in manager type.) Also, the manager uses all available information to choose the more profitable project. However, the owner cannot attain this first-best solution without information about manager type and information search. The two problems cannot be decomposed. As a result, the optimal (second-best) contract always induces distortions in information acquisition and, for the case of the risk-averse manager, induces overinvestment in the risky project. Furthermore, communication of the search result is strictly valuable. The results suggest that optimal responses to information asymmetry among the members of the firm could result in practices that seem to disregard the value of information search and to use acquired information sub-optimally. The results also lend support to the use of accounting reports, such as budgets, in managerial performance evaluation.]

Reviews the book "Business Behavior and Information," edited by Yuji Ijiri and Isao Nakano.

[The quality of capacity planning significantly affects firm profitability, particularly for firms in service industries. In practice, firms use product cost data to infer the expected cost of under- and over-stocking capacity and to determine installed capacity. Theory shows that this is not optimal practice. In light of the informational and computational complexities associated with the optimal theoretical formulation, the use of product cost may be justified as a heuristic. For a multi-product, multi-resource firm, we use simulations to investigate the efficiency of four cost-based decision rules in determining the expected cost of under- and over-stocking capacity. Results indicate surprisingly high performance levels, relative to a benchmark solution. The performance of the product-based planning rule deteriorates as products increasingly share capacity resources. The opposite is true for resource-focused rules. There appears to be significant value from identifying mechanisms to balance installed capacity across resources.]

[This paper examines whether firms exhibiting improved inventory utilization subsequent to JIT adoption achieve a corresponding increase in their Return on Assets (ROA) and whether firm-specific characteristics affect such ROA responses. On average, we do not find a significant ROA response to JIT adoption. Cross-sectionally, JIT adopting firms with a diffuse customer base have a superior ROA response relative to both adopting firms with a high degree of customer concentration and their matched control firms. Evidence is consistent with a superior ROA response for firms with lower inventory turns in the adoption year, particularly for work-in-process inventory. Data do not support the prediction that firms with lower committed costs will report a greater ROA response than firms with a higher proportion of committed costs.]

The quality of capacity planning significantly affects firm profitability, particularly for firms in service industries. In practice, firms use product cost data to infer the expected cost of under- and over-stocking capacity and to determine installed capacity. Theory shows that this is not optimal practice. In light of the informational and computational complexities associated with the optimal theoretical formulation, the use of product cost may be justified as a heuristic. For a multi-product, multi-resource firm, we use simulations to investigate the efficiency of four cost-based decision rules in determining the expected cost of under- and over-stocking capacity. Results indicate surprisingly high performance levels, relative to a benchmark solution. The performance of the product-based planning rule deteriorates as products increasingly share capacity resources. The opposite is true for resource-focused rules. There appears to be significant value from identifying mechanisms to balance installed capacity across resources.

Examines whether firms exhibiting improved inventory utilization subsequent to just-in-time (JIT) adoption achieve a corresponding increase in their Return on Assets (ROA). Effects of JIT adoption; Effects of customer concentration; Effects of cost structure.

We use a laboratory experiment to examine whether corporate giving to charity motivates employees. We find a strong altruism effect. Even when employees cannot be remunerated for their actions, employee contributions to employers significantly increase as the level of corporate giving increases. We also find a signaling effect. When employees can be remunerated for their actions, employee contributions initially increase as the level of corporate giving increases. Thus, even though corporate giving to charity decreases the amount that can be shared between employees and employers, employees behave as if more charitable employers will return proportionally more to employees. It is not until relatively high levels of corporate giving that employee contributions to employers eventually decrease. Collectively, our results suggest that corporate giving is an effective lever for motivating employee effort and contributions to organizational endeavors. Corporate giving can increase the efficacy of implicit (relational) contracts and reduce the need for formal accounting-based reward systems and controls.