In reverse chronological order.

January 2008 [June 2008]

A model of corporate governance must explain (i) why governance matters; (ii) variation in governance across firms (i.e., be responsive to the Demsetz and Lehn, 1985, critique); and (iii) the positive correlations found empirically between quality of corporate governance and corporate performance. The model presented here satisfies these three criteria. It assumes exogenous variation in firm potential. Firms with the best potential to perform well have the most to lose from poor governance; so they adopt stronger governance. Additionally, the model explains the correlation between firm size and executive compensation and why observed managerial incentives seem too low, among other phenomena. Open PDF of paper

with Michael S. Weisbach, Fall 2007 [April 2008 most current version.]

Abstract
Disclosure is widely believed to play an important role in corporate governance. Yet, previous academic analyses of disclosure have focused on issues other than governance. We consider disclosure in the context of corporate governance. Our basic argument is that disclosure is a two-edged sword. On the one hand, disclosure of information permits principals to make better decisions. On the other hand, it can create or exacerbate agency problems; the release of information has the potential to harm agents (e.g., management) either through the actions it might induce the principals to take (e.g., dismiss the agent) or because they care about how they or the enterprise is perceived (e.g., the agents have career concerns or hold equity in the firm). Consequently, agents can be led to pursue actions that are not in the principals' interests. Moreover, these problems become worse, the more precise the principals' information. We present a series of models formalizing this idea. Depending on circumstances, more precise signals or greater transparency can raise or lower profits. Open PDF of paper

August 2007 draft of chapter for forthcoming Handbook of Organization (Gibbons & Roberts, eds.)

Abstract
Much of the economics of organization deals with the formal rights and rules that govern organizations. But, importantly, the operation of organizations is also determined by informal means as well. Two such means are leadership, a concept distinct from authority, and corporate culture, a broad concept covering the informal rules and expectations that affect operations. This chapter surveys the literature on these informal aspects of organization. Because, until recently, they received attention almost exclusively from the non-economic social sciences, this chapter will necessarily be eclectic with respect to the disciplines from which it draws. On the other hand, because this handbook is intended primarily for economists and there has been growing attention to these topics within economics, much of the focus will be economic analyses of leadership and corporate culture. Open PDF of paper

with Michael L. Katz, December 2006 [May 2008]

Abstract
We examine situations in which a party must make a sunk investment prior to contracting with a second party to purchase an essential complementary input. We study how the resulting hold-up problem is affected by the seller's information about the investing party's likely returns from its investment. Our principal focus is on the effects of the investment’s being observable by the non-investing party. Contrary to popular intuition, we find that an improvement in the seller's information (e.g., the investment's being observable rather than not) can benefit the buyer and harm the seller. We also find that other popular intuitions about this problem are either false, incomplete, or require strong assumptions to be valid. Open PDF of paper

with Michael L. Katz, October 2006

Abstract
The literature on intercarrier compensation generally focuses on welfare effects that arise when intercarrier charges affect traffic-sensitive retail charges and, thus, calling patterns. However, many, if not most local telephone users in the U.S. do not face such charges. We examine a duopoly market with no usage-sensitive retail charges. Another key feature is that the entrant can target consumers based on their ratio of inbound to outbound calls. A non-zero access charge induces the entrant to target fewer end users than would a zero access charge because targeting allows the entrant to have an unbalanced traffic flow and thus benefit from a net inflow of access charges. Because it can choose the direction of any access imbalance, the entrant prefers larger absolute values of the access charge. This effect is also a motive for the incumbent to prefer to have no charge. On the other hand, when the entrant is less efficient than incumbent, the access charge acts to soften competition in a way that could make the incumbent a net beneficiary of a non-zero access charge. When the entrant is at least as efficient as the incumbent, a zero access charge maximizes total surplus.

with Michael L. Katz, July 2005

Abstract
Both senders and receivers of telecommunications messages derive benefits, creating the possibility of externalities. We explore whether intercarrier compensation (i.e., access charges) can induce carriers to internalize these external effects. In our baseline model, access charges can induce an efficient ratio of off-net send and receive prices-taking their sum as given-but cannot induce the correct sum. The latter requires a mechanism for cross-carrier internalization, such as repeat play or pricing policies contingent on one another. However, if these internalizing mechanisms are present, access charges are irrelevant. Lastly, the balancing role for access charges can imply non-zero access charges are efficient even in highly symmetrical situations.

with Michael L. Katz, July 2001

Abstract
Previous work on network interconnection has tended to overlook that both the sender and receiver of an electronic message take actions, bear costs,and derive benefits from the message exchange. In a simple model with two-sided benefits and fixed network architectures, we find that the socially optimal interconnection charge is independent of the “direction” of the message and is used to induce optimal end-user prices for sending and receiving messages that account for demand conditions. These optimal retail prices depend solely on the sum of the marginal costs of exchanging a message across the two networks, not the specific marginal costs of the individual networks. Optimal interconnection pricing with endogenous network investment is also explored. Open PDF of paper