Decision Making & Negotiations

Multidivisional firms frequently rely on external market prices in order to value internal transactions across profit centers. This paper examines the transfer pricing problem in a setting in which an upstream division has monopoly power in selling a proprietary component both to a downstream division within the same firm and to external customers. When internal transfers are valued at the prevailing market price, the resulting transactions are distorted by double marginalization.

Idea generation (ideation) is critical to the design and marketing of new products, to marketing strategy, and to the creation of effective advertising copy. However, there has been relatively little formal research on the underlying incentives with which to encourage participants to focus their energies on relevant and novel ideas. Several problems have been identified with traditional ideation methods. For example, participants often free ride on other participants' efforts because rewards are typically based on the group-level output of ideation sessions.

Friedman's contribution to the consumption literature goes well beyond the seminal permanent-income hypothesis. He conjectured that the marginal propensity to consume out of financial wealth shall be larger than out of "human wealth," the present discounted value of future labor income. I present an explicitly solved model to deliver this widely-noted consumption property by specifying that the conditional variance of changes in income increases with its level.

We develop a dynamic incomplete-markets model where an entrenched insider, facing imperfect investor protection and non-diversifiable illiquid business risk, makes interdependent consumption, portfolio choice, expropriation, corporate investment, ownership, and business exit decisions.

Vertical integration is often proposed as a way to resolve hold-up problems, ignoring the empirical fact that division managers tend to maximize divisional (not firmwide) profit when investing. This paper develops a model with asymmetric information at the bargaining stage and investment returns taking the form of cash and "empire benefits." Owners of a vertically integrated firm then will provide division managers with low-powered incentives so as to induce them to bargain "more cooperatively," resulting in higher investments and overall profit as compared with non-integration.

This paper examines optimal advertised quality, actual quality, and price for a firm entering a market. It develops a two-period model where advertised quality influences expectations, and hence trial and the gap between actual quality and expectations determines satisfaction, which in turn impacts second-period sales. In such situations a company makes a choice between advertising high quality and getting trial, but little repeat; and advertising low quality and getting low trial, but high repeat.

The authors argue that high self-monitors may be more sensitive to the status implications of social exchange and more effective in managing their exchange relations to elicit conferrals of status than low self-monitors. In a series of studies, they found that high self-monitors were more accurate in perceiving the status dynamics involved both in a set of fictitious exchange relations and in real relationships involving other members of their social group.

We develop a model of lending and borrowing in markets where the lender has no access to physical collateral and where the borrower is heavily capital constrained. Our model of micro loans, which incorporates a) the absence of access to physical collateral, b) peer monitoring, c) threat of punishment upon default, and d) costly monitoring by lenders is used to determine the equilibrium borrowing rates. Monitoring by lenders is shown to be critical for an equilibrium to exist in our model if the maturity of the loan is too long.

The role of private equity in global capital markets appears to be expanding at an extraordinary rate. Morgan Stanley estimates that there are now some 2,700 private equity funds that either have raised, or are in the process of raising, a total of $500 billion. With this abundance of available equity capital, the willingness of private equity firms to participate in "club" deals, and the leverage that can be put on top of the equity, private equity buyers now appear able and willing to pay higher prices for assets than ever before.