Abstract
Purpose This paper aims to explore the design of management teams when the critical task facing individual managers is monitoring the performance of worker teams and producing performance measures under uncertain information environments. Design/methodology/approach The authors use a multi-agent LEN framework – linear contract, exponential utility and normal density – to model the incentive provision and organizational design. Findings The main lesson is that the use of performance measures under uncertainty is greatly affected by the potential for free-riding in the very monitoring activities which generate the measures to begin with. Accordingly, the value of having a management team, that is the incremental benefit of having a second manager, depends on the monitoring technology. Of particular importance are the potential free-riding in monitoring effort among multiple managers and synergies gained from having more than one manager, such as correlation among the performance measures produced or improvement due to splitting workers pool into separate groups for each manager to monitor separately. Originality/value The paper pushes this line of research further by explicitly modeling the endogenous process of signal generation within a rich economic environment. In this environment, number of workers being evaluated and number of managers who produce the signals are both endogenous. Furthermore, both workers and managers are subject to moral hazard problem. In particular, the managers suffer from potential free-riding problems but may benefit from synergistic forces due to team monitoring.
Highlights
This paper explores the design of management teams when the critical task facing individual managers is monitoring the performance of worker teams and producing performance measures under uncertain information environments
This managerial teams paper offers a theory of management team based on the idea that organizations optimally balance the management team size, worker team size and pay-forperformance intensity in compensation contracts for management and workers
As long as the performance measure y is available for contracting, the tension we study in this paper remains, while the quantitative result may vary
Summary
This paper explores the design of management teams when the critical task facing individual managers is monitoring the performance of worker teams and producing performance measures under uncertain information environments. The firm reduces the size of the worker team to further compensate for the larger risk premium that arises from increases in the exogenous parameters This illustrates how the firm will use both instruments, incentives and team size, to adapt to changes in the environment, such as production uncertainty, risk preferences, cost of effort, etc. This corollary shows that workers and managers are substitutes rather than complements. Evaluated at nء, the optimal incentive b ءis invariant with respect to measurement uncertainty , worker risk aversion r, number of managers L and worker and manager cost of efforts, c and k This invariance property proves the richness of modeling firm structure in addition to firm contracts. As in P4, even when team sizes are attuned to be efficient in light of the correlation in performance signals, it is strictly valuable for the owner to employ a second manager when, and only when, the signals he generates are negatively correlated with those of the existing manager
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