New Technologies and the design of Hierarchies

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New Technologies and the design of Hierarchies
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Introduction

• The problem how to set up a hierarchy when the
  property rights are not easy to define?
• Hierarchy with the possibility to define property
  rights
• 1. Aghion Tirole (1997)
• The difference between formal and real and
  authority
• 2. Hart et Moore (2005)
• The delegation of decision rights
• Hierarchy without the possibility or the
  necessity to define property rights
• Rajan and Zingales (2001)

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References

• Aghion, P. et Tirole, J. (1997) Formal and Real
  Authority in Organizations, Journal of Political
  Economy, 105, 11 1-29.
• Hart, O. et Moore, J. (2005) On the Design of
  Hierarchies  coordination versus
  Specialization, Havard Institute for Economic
  Research, Discussion Paper 1880
• Rajan, R. G. et Zingales, L. (2001) The Firm as
  a dedicated Hierarchy a Theory of the Origins
  and Growth of Firms, Quarterly Journal of
  Economics, 305-851.
• Simon, H. (1951) A Formal Theory of Employement
  Relationship, Econometrica, 5, 2 293-305.

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Hierarchy with the definition of property rights

• 1. Aghion Tirole (1997)
• Based on the difference between formal and real
  authority
• Authority may be confered by the ownership of an
  asset, which gives the owner the right to make
  decisions concerning the use of this asset (AT,
  p. 2)
• This formal authority, however, needs not confer
  real authority, that is an effective control over
  decisions, on its holder. (id.).
• This difference is assumed because there is some
  asymmetry of information
• AT use a principal-agent model and the GHM ICT.

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Le modèle Aghion Tirole (1997)

• A (the agent) makes an effort to propose a
  project to the principal (P ).
• P chooses a level of effort in order to know the
  potential project.
• A does not necessarily proposes the optimal
  project for P but the project that is the best
  for him.
• P either chooses his project or the agents one.
• The hierarchy is composed by a principal and an
  agent
• P-formal authority (integration) the principal,
  has formal authority. P can overrule A if P is
  informed and A gives not congruent
  recommendation. If the recommendation is
  congruent A has real authority.
• A-formal authority (delegation) A is informed.
  He has formal authority.

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• Let E be the probability that P is informed
  (resp.(1-E) that he is not) e, the probability
  that A is informed
• gP (E) (resp. gA(e)) the cost for P (resp. A) to
  search for information
• B the benefit given by the project of P, b the
  private profit for A given by the project of A
• ?B the share P gives to A if the project of A is
  applied and ?b the part received by A if the
  project of P is implemented.

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Le modèle Aghion Tirole (1997)

• Under P-formal authority the utility functions of
  P and A are the following
• and
• Under A-formal authority the utility functions of
  P and A are the following
• and

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• Reaction curves of both P and A are

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2. Hart et Moore (2005)

• The aim of the paper a model of hierarchy based
  on the allocation of authority
• The owner of a set of assets is supposed to have
  the right to decide on the use of those assets
• This implies both 1) time and 2) capacities
• He/she can delegate these rights to decide to
  his/her subordinates
• His/her subordinates have the same constraints
  (time and capacities)
• It is then possible to conceive a command chain
  (a way of mapping individuals and assets)
• HM analyze the characteristics of an optimal
  command chain

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2. Hart et Moore (2005)

• the model
• m assets and n individuals (identical et
  neutral/risk)
• On a set A of assets one defines a relation t(A),
  the proposed tasks on the assets
• There exists a probability p(A) for a task to
  become an idea with a value V(A) that is positive
  or nil.

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2. Hart et Moore (2005)

• Assumptions
• A1 in order to realize v(A) individual i who
  proposes a task t(A) needs to have access to all
  the elements of A
• A2 no externalities
• A3 no interaction between individuals when they
  have ideas
• A4 no renegotiation ex post
• A5 bargaining with no cost at t0 and
  individuals do not have outcome constraints

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2. Hart et Moore (2005)

• Theorem
• Let an optimal organizational form
• if p(Ai)gtp(Aj) then ? ak ? Ai ? Aj , j is before
  i in Lk
• Cross arrangements are non optimal, if j is
  before i in the list Lk, then there is no k
  such that i is before j in Lk

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2. Hart et Moore (2005)

• Extensions
• A part of the value of an idea can be
  contractualisable
• An individu can have an idea on the use of assets
  even if he as not access at all the set of those
  assets.
• Introduction of a veto of an idea
• Endogenous definition of p(Ai)

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Rajan Zingales (2001)

• Bhide 200, p. 94 reports that 71 percent of
  the firms included in the Inc 500 (a list of
  young, fast growing firms) were founded by people
  who replicated or modified an idea encountered in
  their previous employment. (RZ, 2001, p. 806)
• The problem is then to define a hierarchy when it
  is possible for the managers, who are needed by
  the entrepreneur who want to develop a critical
  resource to expropriate the entrepreneur and
  compete with him/her.
• RZ compare two kinds of hierarchy a vertical or
  deep one and an horizontal or flat one.
• They propose a model that compare the interest of
  the two organizational structures, depending on
  the cost of expropriation, and the gain to
  compete as compare with the gain to specialize

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Rajan Zingales (2001)
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Rajan Zingales (2001)
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Rajan Zingales (2001)
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Rajan Zingales (2001)

• The results (for the vertical hierarchy)

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Rajan Zingales (2001)

• The incentive results (comparison between
  vertical and horizontal hierarchies)
• The main problem in a vertical hierarchy is
  expropriability. This limits the size of the
  hierarchy

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Conclusion

• The AT model as a theoretical benchmark (1997)
• The limits of the approaches based on the
  ownership
• RZ (1998, 2001) as a more general approach that
  is not constraints by the definition of property
  rights
• The interest of the works of Garicano (2002)