Pierre Fleckinger

What is the most efficient way of designing incentives in an organization? Over the past five decades, agency theory has provided various answers to this crucial question. This line of research suggests that, depending on the organizational context, the optimal approach to providing incentives may involve either relying on collective compensations or, conversely, employing relative performance evaluations. In the first scenario, cooperation among agents is the key aspect of the organization. In the second, competition prevails. This paper provides a comprehensive overview of this extensive literature, with the aim of understanding the conditions under which one or the other type of incentive schemes is more desirable for the principal of the organization. To this end, we use a flexible and versatile model capable of addressing a wide range of scenarios characterized by different technologies, information constraints, and behavioral norms.

In the European Union, Energy Performance Certificates (EPCs) provide potential buyers or tenants with information on a property’s energy performance. By mitigating informational asymmetries on real estate markets, the conventional wisdom is that they will reduce energy use, increase energy-efficiency investments, and improve social welfare. We develop a model that partly contradicts these predictions. Although EPCs always improve social welfare in the absence of market failures other than asymmetric information, their impact on energy use and investments is ambiguous and depends both on the time horizon considered and the distribution of energy needs in the population. This implies that, in a second-best world where energy externalities are under-priced, EPCs can damage social welfare.

Oliver Hart and Bengt Holmström were awarded the 2016 Swedish National Bank’s Prize in Economic Sciences in Memory of Alfred Nobel for their contributions to the Theory of Contracts. Their works build a theory of firms and organizations that is based on two pillars: (1) Parties exert efforts or incur investments that increase the value of their relationships, but these actions are sometimes hidden, not directly observed, and thus cannot be contractually enforced by courts, and (2) contracts and ownership structures are (imperfect) responses to such informational frictions. Together, the contributions of these authors have paved the way for a complete renewal of the Theory of the Firm and Organizations Theory.

We develop a model of costly quality provision under biased disclosure. We define as friendly an environment in which the disclosure probability increases with quality, and as hostile an environment in which the opposite holds. Hostile environments produce a positive externality among sellers and potentially multiple equilibria. In contrast, friendly environments always yield a unique equilibrium. We establish that the environment that maximizes quality generates signals contradicting buyers’ expectations. Hence, hostility produces greater incentives for quality than friendliness when costs are low and monitoring resources high.