Since 1973 technological, political, regulatory, and economic forces have been changing the worldwide economy in a fashion comparable to the changes experienced during the nineteenth century Industrial Revolution. As in the nineteenth century, we are experiencing declining costs, increaing average (but decreasing marginal) productivity of labor, reduced growth rates of labor income, excess capacity, and the requirement for downsizing and exit. The last two decades indicate corporate internal control systems have failed to deal effectively with these changes, especially slow growth and the requirement for exit. The next several decades pose a major challenge for Western firms and political systems as these forces continue to work their way through the worldwide economy. © M. C. Jensen, 1993

We investigate how the contractibility of actions affecting the value of an asset affects asset ownership by examining how truck ownership has changed with the diffusion of on-board computers (OBCs). We develop and test the proposition that driver ownership should decrease with OBC adoption, particularly for hauls where drivers have the greatest incentive to drive in non-optimal ways or engage in rentseeking behavior. We present evidence consistent with this proposition: driver ownership decreases with OBC adoption, especially for long hauls. In contrast, driver ownership falls less with adoption for hauls that use trailers for which demands are unidirectional than bi-directional, corresponding to differences in the rent-seeking costs of driver ownership. We also find that non-owner drivers with OBCs drive better than those without them. These results suggest that increases in contractibility may lead to less independent contracting and larger firms.

We analyze empirically the system of allocation of rights and monetary incentives in a sample of automobile franchise contracts. We find that the contracts create an asymmetric assignment of decision rights: while they substantially restrict the decision rights of dealers, they grant manufacturers extensive implementation and enforcement powers, converting the manufacturers, de facto, in a sort of quasi-judiciary instance. We also find that the variation in the system of rights assignment and monetary incentives responds to efficiency considerations. In particular, when the cost of dealer moral hazard is higher and the risk of manufacturer opportunism is lower, manufacturers enjoy larger discretion in both determining the desired performance from the dealers in their network and in using mechanisms such as monitoring, termination and monetary incentives to ensure this performance is provided. We also explore the existence of interdependencies between the different elements of the system. We find that the evidence does not support the conclusion

Agency theory implies that asset ownership and decision authority are complements. Using 1998 data from Texas commercial banks, we test whether the likelihood of local ownership of bank offices increases with the importance of granting local managers greater decision authority (for example, due to location or customer base). Our empirical evidence is consistent with this hypothesis. It suggests that complementarities between strategy and organizational structure can foster differentiation among firms in terms of location, customers, and products. It also supports the growing view that small locally-owned banks have a comparative advantage over large banks within specific environments.

This paper analyzes the effect of market concentration and product differentiation on the observed outcomes of competition among oligopolists. The empirical framework is designed to examine whether competition is less intense in markets with equal levels of concentration, but more differentiation among the products offered. A two-stage estimation procedure is proposed to address the endogeneity problem inherent when comparing outcomes across different market structures. I estimate the competitive effects using data from a cross-section of oligopoly motel markets located along U.S. interstate highways. The results indicate that firms benefit substantially by offering differentiated products. The presence of any market competitor drives down prices, but the effect is much smaller when the competitor is a different product type. Differentiation is optimal product choice behavior because the resulting competition among firms is less tough when their products are differentiated. I.

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This study provides evidence on the determinants of contract duration using a large sample of franchise contracts. We find that the term of the contract systematically increases with the franchisee’s physical and human capital investments, measures of recontracting costs, and the franchisor’s experience in franchising (which we argue is negatively related to uncertainty about optimal contract provisions). These results are consistent with the hypothesis that the optimal contract duration involves a tradeoff between protecting the parties against potential hold-up of relationship-specific investment and reducing the flexibility that the parties have to respond to environmental changes.

A moral hazard problem arises in "diagnosis-cure" markets such as auto repair and health care when sellers have an incentive to distort or misrepresent a buyer's condition in order to increase demand for the treatments they supply. This paper examines one such market: California vehicle emission inspections. Using transaction-level data, I investigate whether the market provides incentives that lead inspectors to help vehicles pass. A novel feature of these data is that they contain inspections completed by state officials outside of the normal inspection market as well as inspections completed by individuals working at competitive private firms. Contrasts between these groups provide evidence regarding the strength of market incentives. I also examine how the behavior of inspectors varies with their firm's competitive environment and organizational characteristics. I find that consumers are generally able to provide firms and inspectors strong incentives toward helping them pass, and ...

the Russell Sage Foundation. The findings and conclusions do not necessarily reflect the views or the policies of those parties or any specific agency mentioned in the article. We

Collective reputation and its associated free-rider problem have been invoked to justify state licensing of professions and to explain the incidence of franchising. We examine the conditions under which it is possible to create a Pareto-improving collective reputation among groups of heterogeneous producers. If the regulator or franchisor cannot credibly commit to high quality then a common reputation can be created only if the groups are not too different and if marginal cost is declining. High cost groups benefit most from forming a common regime.