CHAPTER 15 - ASYMMETRIC INFORMATION AND ORGANIZATIONAL DESIGN
Incentive Pay at DuPont, where standard pay raises were eliminated and replaced by an
incentive-based bonus system for all managers and employees, based on profit goals for each division.
employees focused more on overall company performance instead of narrowly focusing on
their own particular job, and they now had more incentive to suggest strategies to cut cost and increase
Better alignment between goals of shareholders and managers-employees.
The issues raised by the DuPont case include: asymmetric information between shareholders and
managers, imperfect alignment of the interests of the two parties, the potential that one party in a
transaction will take advantage of another party, incentive compatible arrangements, separation of
ownership and control, etc. These are all important issues for the corporate structure, and we address
these issues in CH 15.
The typical situation in a business arrangement or contract where there is an inequality (asymmetry) of
information about key economic facts.
In an employment situation, as an applicant and potential employee for a firm, you know
more about your true abilities and your willingness to work and your commitment to stay with the firm,
etc. than the employer does. The employer knows more about the potential for advancement, the
chances that the firm will be in business in five years, etc.
you apply for a student loan or a business loan, and you know more about your intentions to
pay back the loan, make the payments on time, etc.
you are selling a used car, and you know more about the existing and potential problems than
the buyer. Or for a rare car, the buyer may be a collector and know about the true value, which may be
Asymmetric information can lead to two problems:
In insurance markets, there is asymmetric information because the insured party has more
accurate information about their true risks than the insurance company. What can happen is that people
with the greatest risk, and/or those most likely to file a claim, will be those most actively and
aggressively seeking insurance, a problem called
, or adverse “self-selection.”
Example in book (p. 631):
Company introduces maternity coverage to its employees for an additional
premium. Based on records over the last ten years, 1 out of 20 employees has a new baby each year,
and the premiums are set based on a 1-in-20 payout rate. A few years after the introduction of the new
ECN 469: Managerial Economics
Professor Mark J. Perry