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Page 1: Lecture Zero: Introduction and Logisticsccfour/EO0.pdf · F Family management or family ownership. (Cheng Chen ... Organizational Economics and Contract Theory ... I My lecture notes

Lecture Zero: Introduction and Logistics

Cheng Chen

School of Economics and Finance

The University of Hong Kong

(Cheng Chen (HKU)) Econ 6006 1 / 8

Page 2: Lecture Zero: Introduction and Logisticsccfour/EO0.pdf · F Family management or family ownership. (Cheng Chen ... Organizational Economics and Contract Theory ... I My lecture notes

Firm Organization and Strategy in Daily Life

Managerial incentives and moral hazard:I Shirking (workers); short-termism (CEOs); multi-task (professors).I Apply to government organization as well (short-termism, multi-task,

relative performance measure).

Bank lending and adverse selection:I Heterogeneity in risks and screening (Only risky projects get funded).

Relative performance evaluation:I Grade, promotion, tournament.

Family �rms:I Dominant presence of these �rms in world economy: Out of large (>1

billion) �rms, 85% are family run in South-East Asia, 75% in LatinAmerica, 67% in India and around 65% in the Middle East. China:40%. 15% American Fortune Global 500 �rms: family �rms.

I Even more important when we talk about small and medium sized�rms and far from declining.

I Low productivity and worse managed:F First generation and later generations.F Family management or family ownership.

(Cheng Chen (HKU)) Econ 6006 2 / 8

Page 3: Lecture Zero: Introduction and Logisticsccfour/EO0.pdf · F Family management or family ownership. (Cheng Chen ... Organizational Economics and Contract Theory ... I My lecture notes

Firm Organization and Strategy in Daily Life

Managerial incentives and moral hazard:I Shirking (workers); short-termism (CEOs); multi-task (professors).I Apply to government organization as well (short-termism, multi-task,

relative performance measure).

Bank lending and adverse selection:I Heterogeneity in risks and screening (Only risky projects get funded).

Relative performance evaluation:I Grade, promotion, tournament.

Family �rms:I Dominant presence of these �rms in world economy: Out of large (>1

billion) �rms, 85% are family run in South-East Asia, 75% in LatinAmerica, 67% in India and around 65% in the Middle East. China:40%. 15% American Fortune Global 500 �rms: family �rms.

I Even more important when we talk about small and medium sized�rms and far from declining.

I Low productivity and worse managed:F First generation and later generations.F Family management or family ownership.

(Cheng Chen (HKU)) Econ 6006 2 / 8

Page 4: Lecture Zero: Introduction and Logisticsccfour/EO0.pdf · F Family management or family ownership. (Cheng Chen ... Organizational Economics and Contract Theory ... I My lecture notes

Firm Organization and Strategy in Daily Life

Managerial incentives and moral hazard:I Shirking (workers); short-termism (CEOs); multi-task (professors).I Apply to government organization as well (short-termism, multi-task,

relative performance measure).

Bank lending and adverse selection:I Heterogeneity in risks and screening (Only risky projects get funded).

Relative performance evaluation:I Grade, promotion, tournament.

Family �rms:I Dominant presence of these �rms in world economy: Out of large (>1

billion) �rms, 85% are family run in South-East Asia, 75% in LatinAmerica, 67% in India and around 65% in the Middle East. China:40%. 15% American Fortune Global 500 �rms: family �rms.

I Even more important when we talk about small and medium sized�rms and far from declining.

I Low productivity and worse managed:F First generation and later generations.F Family management or family ownership.

(Cheng Chen (HKU)) Econ 6006 2 / 8

Page 5: Lecture Zero: Introduction and Logisticsccfour/EO0.pdf · F Family management or family ownership. (Cheng Chen ... Organizational Economics and Contract Theory ... I My lecture notes

Firm Organization and Strategy in Daily Life

Managerial incentives and moral hazard:I Shirking (workers); short-termism (CEOs); multi-task (professors).I Apply to government organization as well (short-termism, multi-task,

relative performance measure).

Bank lending and adverse selection:I Heterogeneity in risks and screening (Only risky projects get funded).

Relative performance evaluation:I Grade, promotion, tournament.

Family �rms:I Dominant presence of these �rms in world economy: Out of large (>1

billion) �rms, 85% are family run in South-East Asia, 75% in LatinAmerica, 67% in India and around 65% in the Middle East. China:40%. 15% American Fortune Global 500 �rms: family �rms.

I Even more important when we talk about small and medium sized�rms and far from declining.

I Low productivity and worse managed:F First generation and later generations.F Family management or family ownership.

(Cheng Chen (HKU)) Econ 6006 2 / 8

Page 6: Lecture Zero: Introduction and Logisticsccfour/EO0.pdf · F Family management or family ownership. (Cheng Chen ... Organizational Economics and Contract Theory ... I My lecture notes

Firm Organization and Strategy in Daily Life

Managerial incentives and moral hazard:I Shirking (workers); short-termism (CEOs); multi-task (professors).I Apply to government organization as well (short-termism, multi-task,

relative performance measure).

Bank lending and adverse selection:I Heterogeneity in risks and screening (Only risky projects get funded).

Relative performance evaluation:I Grade, promotion, tournament.

Family �rms:I Dominant presence of these �rms in world economy: Out of large (>1

billion) �rms, 85% are family run in South-East Asia, 75% in LatinAmerica, 67% in India and around 65% in the Middle East. China:40%. 15% American Fortune Global 500 �rms: family �rms.

I Even more important when we talk about small and medium sized�rms and far from declining.

I Low productivity and worse managed:F First generation and later generations.F Family management or family ownership.

(Cheng Chen (HKU)) Econ 6006 2 / 8

Page 7: Lecture Zero: Introduction and Logisticsccfour/EO0.pdf · F Family management or family ownership. (Cheng Chen ... Organizational Economics and Contract Theory ... I My lecture notes

Firm Organization and Strategy in Daily Life

Managerial incentives and moral hazard:I Shirking (workers); short-termism (CEOs); multi-task (professors).I Apply to government organization as well (short-termism, multi-task,

relative performance measure).

Bank lending and adverse selection:I Heterogeneity in risks and screening (Only risky projects get funded).

Relative performance evaluation:I Grade, promotion, tournament.

Family �rms:I Dominant presence of these �rms in world economy: Out of large (>1

billion) �rms, 85% are family run in South-East Asia, 75% in LatinAmerica, 67% in India and around 65% in the Middle East. China:40%. 15% American Fortune Global 500 �rms: family �rms.

I Even more important when we talk about small and medium sized�rms and far from declining.

I Low productivity and worse managed:F First generation and later generations.F Family management or family ownership.

(Cheng Chen (HKU)) Econ 6006 2 / 8

Page 8: Lecture Zero: Introduction and Logisticsccfour/EO0.pdf · F Family management or family ownership. (Cheng Chen ... Organizational Economics and Contract Theory ... I My lecture notes

Organizational Economics and Contract Theory

Recent Nobel Prize winners: Oliver Hart and Bengt Holmstrom fortheir contributions to contract theory.

Speech: https://www.youtube.com/watch?v=zNWCbJLt6Qchttps://www.youtube.com/watch?v=vI6Dk8sWHzU

Previous Nobel Prize winners: Williamson (2009); Akerlof, Stiglitz andSpence (2001), Mirrlees and Vickrey (1996), and Coase (1991).

Previous Nobel Prize winners (closely related): Tirole (2014); Maskinand Myerson (2007).

(Cheng Chen (HKU)) Econ 6006 3 / 8

Page 9: Lecture Zero: Introduction and Logisticsccfour/EO0.pdf · F Family management or family ownership. (Cheng Chen ... Organizational Economics and Contract Theory ... I My lecture notes

Organizational Economics and Contract Theory

Recent Nobel Prize winners: Oliver Hart and Bengt Holmstrom fortheir contributions to contract theory.

Speech: https://www.youtube.com/watch?v=zNWCbJLt6Qchttps://www.youtube.com/watch?v=vI6Dk8sWHzU

Previous Nobel Prize winners: Williamson (2009); Akerlof, Stiglitz andSpence (2001), Mirrlees and Vickrey (1996), and Coase (1991).

Previous Nobel Prize winners (closely related): Tirole (2014); Maskinand Myerson (2007).

(Cheng Chen (HKU)) Econ 6006 3 / 8

Page 10: Lecture Zero: Introduction and Logisticsccfour/EO0.pdf · F Family management or family ownership. (Cheng Chen ... Organizational Economics and Contract Theory ... I My lecture notes

Organizational Economics and Contract Theory

Recent Nobel Prize winners: Oliver Hart and Bengt Holmstrom fortheir contributions to contract theory.

Speech: https://www.youtube.com/watch?v=zNWCbJLt6Qchttps://www.youtube.com/watch?v=vI6Dk8sWHzU

Previous Nobel Prize winners: Williamson (2009); Akerlof, Stiglitz andSpence (2001), Mirrlees and Vickrey (1996), and Coase (1991).

Previous Nobel Prize winners (closely related): Tirole (2014); Maskinand Myerson (2007).

(Cheng Chen (HKU)) Econ 6006 3 / 8

Page 11: Lecture Zero: Introduction and Logisticsccfour/EO0.pdf · F Family management or family ownership. (Cheng Chen ... Organizational Economics and Contract Theory ... I My lecture notes

Key Aspect of This Course

Information Asymmetry and con�ict of interestsI Rent and e�ciency.I First best (FB) and Second best (SB).

Two fundamental issues:I Hidden information: Adverse Selection (AS).I Hidden action: Moral Hazard (MH).

Two fundamental constraints:I Incentive-compatibility constraint (IC)I Participation constraint (PC) or individual rationality constraint (IR).

(Cheng Chen (HKU)) Econ 6006 4 / 8

Page 12: Lecture Zero: Introduction and Logisticsccfour/EO0.pdf · F Family management or family ownership. (Cheng Chen ... Organizational Economics and Contract Theory ... I My lecture notes

Key Aspect of This Course

Information Asymmetry and con�ict of interestsI Rent and e�ciency.I First best (FB) and Second best (SB).

Two fundamental issues:I Hidden information: Adverse Selection (AS).I Hidden action: Moral Hazard (MH).

Two fundamental constraints:I Incentive-compatibility constraint (IC)I Participation constraint (PC) or individual rationality constraint (IR).

(Cheng Chen (HKU)) Econ 6006 4 / 8

Page 13: Lecture Zero: Introduction and Logisticsccfour/EO0.pdf · F Family management or family ownership. (Cheng Chen ... Organizational Economics and Contract Theory ... I My lecture notes

Key Aspect of This Course

Information Asymmetry and con�ict of interestsI Rent and e�ciency.I First best (FB) and Second best (SB).

Two fundamental issues:I Hidden information: Adverse Selection (AS).I Hidden action: Moral Hazard (MH).

Two fundamental constraints:I Incentive-compatibility constraint (IC)I Participation constraint (PC) or individual rationality constraint (IR).

(Cheng Chen (HKU)) Econ 6006 4 / 8

Page 14: Lecture Zero: Introduction and Logisticsccfour/EO0.pdf · F Family management or family ownership. (Cheng Chen ... Organizational Economics and Contract Theory ... I My lecture notes

Logistics

Lectures: Mon. 6:45-9:45.

O�ce hour: Tue. and Fri.: 3pm to 4pm or by appointment (startingfrom 2nd. week).

Prerequisites: MA-level microeconomic theory; knowledge of(multivariate) calculus and basic probability theory and statistics.

Materials:I My lecture notes (self-contained).I Reference one: �Contract Theory� (Princeton University Press, 2005)

by Patrick Bolton and Mathias DewatripontI Reference two: �Handbook of Organizational Economics� (Princeton

University Press, 2012) edited by Robert Gibbons and John Roberts.

Slides are available at http://www.sef.hku.hk/~ccfour/.

(Cheng Chen (HKU)) Econ 6006 5 / 8

Page 15: Lecture Zero: Introduction and Logisticsccfour/EO0.pdf · F Family management or family ownership. (Cheng Chen ... Organizational Economics and Contract Theory ... I My lecture notes

Logistics

Lectures: Mon. 6:45-9:45.

O�ce hour: Tue. and Fri.: 3pm to 4pm or by appointment (startingfrom 2nd. week).

Prerequisites: MA-level microeconomic theory; knowledge of(multivariate) calculus and basic probability theory and statistics.

Materials:I My lecture notes (self-contained).I Reference one: �Contract Theory� (Princeton University Press, 2005)

by Patrick Bolton and Mathias DewatripontI Reference two: �Handbook of Organizational Economics� (Princeton

University Press, 2012) edited by Robert Gibbons and John Roberts.

Slides are available at http://www.sef.hku.hk/~ccfour/.

(Cheng Chen (HKU)) Econ 6006 5 / 8

Page 16: Lecture Zero: Introduction and Logisticsccfour/EO0.pdf · F Family management or family ownership. (Cheng Chen ... Organizational Economics and Contract Theory ... I My lecture notes

Logistics

Lectures: Mon. 6:45-9:45.

O�ce hour: Tue. and Fri.: 3pm to 4pm or by appointment (startingfrom 2nd. week).

Prerequisites: MA-level microeconomic theory; knowledge of(multivariate) calculus and basic probability theory and statistics.

Materials:I My lecture notes (self-contained).I Reference one: �Contract Theory� (Princeton University Press, 2005)

by Patrick Bolton and Mathias DewatripontI Reference two: �Handbook of Organizational Economics� (Princeton

University Press, 2012) edited by Robert Gibbons and John Roberts.

Slides are available at http://www.sef.hku.hk/~ccfour/.

(Cheng Chen (HKU)) Econ 6006 5 / 8

Page 17: Lecture Zero: Introduction and Logisticsccfour/EO0.pdf · F Family management or family ownership. (Cheng Chen ... Organizational Economics and Contract Theory ... I My lecture notes

Evaluation

Tests:I Midterm exam (20%) 7-8:30 pm on April/16th. (Mon.)I Final exam (60%): 7-10 pm on May/7 (Mon.)

Homework:I 3 (+1) problem sets (10%).I Class Presentation and participation (10%).

No o�ce hours on Feb./9, 13, 20, 23 (Fri.) and on Apr./17, 20 (Fri.)

Extra o�ce hours during revision period

(Cheng Chen (HKU)) Econ 6006 6 / 8

Page 18: Lecture Zero: Introduction and Logisticsccfour/EO0.pdf · F Family management or family ownership. (Cheng Chen ... Organizational Economics and Contract Theory ... I My lecture notes

Evaluation

Tests:I Midterm exam (20%) 7-8:30 pm on April/16th. (Mon.)I Final exam (60%): 7-10 pm on May/7 (Mon.)

Homework:I 3 (+1) problem sets (10%).I Class Presentation and participation (10%).

No o�ce hours on Feb./9, 13, 20, 23 (Fri.) and on Apr./17, 20 (Fri.)

Extra o�ce hours during revision period

(Cheng Chen (HKU)) Econ 6006 6 / 8

Page 19: Lecture Zero: Introduction and Logisticsccfour/EO0.pdf · F Family management or family ownership. (Cheng Chen ... Organizational Economics and Contract Theory ... I My lecture notes

Lectures

Part one (1.5 lectures): Management practices and managersI Management practices and �rm performance around the world.I What do managers do?

Part two (2 lectures): Basic TheoryI Basic model of AS (two-type): HW 1.I Basic model of MH (two-action): HW 2.

Part three (4.5 lectures): Applications (empirical and theory)I Family �rms: Basic facts and theory (including my own work).I Managerial incentives: Optimal incentive scheme and evidence.I Hierarchies: Theory and empirical �ndings (including my own work)

and HW 3.I Incomplete contracts and �rm boundary and HW 4.

(Cheng Chen (HKU)) Econ 6006 7 / 8

Page 20: Lecture Zero: Introduction and Logisticsccfour/EO0.pdf · F Family management or family ownership. (Cheng Chen ... Organizational Economics and Contract Theory ... I My lecture notes

Lectures

Part one (1.5 lectures): Management practices and managersI Management practices and �rm performance around the world.I What do managers do?

Part two (2 lectures): Basic TheoryI Basic model of AS (two-type): HW 1.I Basic model of MH (two-action): HW 2.

Part three (4.5 lectures): Applications (empirical and theory)I Family �rms: Basic facts and theory (including my own work).I Managerial incentives: Optimal incentive scheme and evidence.I Hierarchies: Theory and empirical �ndings (including my own work)

and HW 3.I Incomplete contracts and �rm boundary and HW 4.

(Cheng Chen (HKU)) Econ 6006 7 / 8

Page 21: Lecture Zero: Introduction and Logisticsccfour/EO0.pdf · F Family management or family ownership. (Cheng Chen ... Organizational Economics and Contract Theory ... I My lecture notes

Lectures

Part one (1.5 lectures): Management practices and managersI Management practices and �rm performance around the world.I What do managers do?

Part two (2 lectures): Basic TheoryI Basic model of AS (two-type): HW 1.I Basic model of MH (two-action): HW 2.

Part three (4.5 lectures): Applications (empirical and theory)I Family �rms: Basic facts and theory (including my own work).I Managerial incentives: Optimal incentive scheme and evidence.I Hierarchies: Theory and empirical �ndings (including my own work)

and HW 3.I Incomplete contracts and �rm boundary and HW 4.

(Cheng Chen (HKU)) Econ 6006 7 / 8

Page 22: Lecture Zero: Introduction and Logisticsccfour/EO0.pdf · F Family management or family ownership. (Cheng Chen ... Organizational Economics and Contract Theory ... I My lecture notes

Lectures

Part Four (1.5 lectures): Advanced theoryI Limited liability, multi-dimensional and multi-agent MH.I Dynamic AS and MH.

Part Five (1 lectures): Organizational Industry OrganizationI Prof. Legros and Prof. Newman's work.I Theory plus empirical work.

Part Six (1.5 lectures): Group presentations and review.

(Cheng Chen (HKU)) Econ 6006 8 / 8

Page 23: Lecture Zero: Introduction and Logisticsccfour/EO0.pdf · F Family management or family ownership. (Cheng Chen ... Organizational Economics and Contract Theory ... I My lecture notes

Lectures

Part Four (1.5 lectures): Advanced theoryI Limited liability, multi-dimensional and multi-agent MH.I Dynamic AS and MH.

Part Five (1 lectures): Organizational Industry OrganizationI Prof. Legros and Prof. Newman's work.I Theory plus empirical work.

Part Six (1.5 lectures): Group presentations and review.

(Cheng Chen (HKU)) Econ 6006 8 / 8

Page 24: Lecture Zero: Introduction and Logisticsccfour/EO0.pdf · F Family management or family ownership. (Cheng Chen ... Organizational Economics and Contract Theory ... I My lecture notes

Lectures

Part Four (1.5 lectures): Advanced theoryI Limited liability, multi-dimensional and multi-agent MH.I Dynamic AS and MH.

Part Five (1 lectures): Organizational Industry OrganizationI Prof. Legros and Prof. Newman's work.I Theory plus empirical work.

Part Six (1.5 lectures): Group presentations and review.

(Cheng Chen (HKU)) Econ 6006 8 / 8