Local CEO Headquarter leading by sacrifice If the CEO is a local manager he

Local ceo headquarter leading by sacrifice if the ceo

This preview shows page 96 - 99 out of 136 pages.

Local CEO: Headquarter leading by sacrifice If the CEO is a local manager, he ignores the realization of θ i . Consequently, he cannot lead, neither by sacrifice nor by example, and he behaves as a regular worker in the transfer stage. The headquarter, on the other hand, knows the realization of θ i . To transmit the value of technology the only option the HQ has is to lead by sacrifice. 28 By assumption, the HQ gets ηT of the value of the transfer stage. Let Ω( µ, x, θ i ) be the fraction of profits accrued to the HQ when workers believe that the probability of the good state 28 This is so because we assume that the HQ CEO does not exert effort in the subsidiary. This assumption can be relaxed. The crucial aspect is that the headquarter are geographically distant from the subsidiary and therefore cannot exert effort prior to the rest of workers in an observable manner. 16
Image of page 96
is equal to µ , the HQ sacrifices x and the true state is θ i . In particular, Ω( µ, x, θ i ) = η (1 η )( µθ H + (1 µ ) θ L ) θ i (8) In the least cost separating equilibrium, x HQ ( θ L ) = 0 and x HQ ( θ H ) = η (1 η )[ θ H θ L θ 2 L ]. That is, such that Ω(1 , x, θ L ) = Ω(0 , x, θ L ). The expected cost of transmitting information is p H x HQ ( θ H ). Result 3: Headquarters expected cost of credibly transmitting the information when they rely on a local manager is increasing in p h and in θ H . Given these E ( T l | HQ ) = p H (1 η ) θ 2 H + (1 p H )(1 η ) θ 2 L (9) Result 4: The transfer expected value is lower when the subsidiary CEO is local than when he is an expatriate that leads by example. 29 Result 5: Expected profits obtained in the transfer stage are higher under an expatriate CEO than a local CEO, and this is even more so for firms with high probability of high value technology (with high p h and high θ H ) . There are two reasons for the first part of this result. First, when an expatriate CEO is relied upon, he can lead by example and has an additional motive to exert higher effort (convince workers that the technology is of high value). Second, an expatriate internalizes the cost of information transmission, given that he is part of the team, a cost that the headquarters has to afford when they rely on a local CEO. The value of relying on an expatriate CEO is increasing in p h and θ H because they make the need and cost of credibly transmitting information more acute. 29 In the appendix we derive the case when the expatriate manager can only lead by sacrifice and compare the cost of transmitting information. 17
Image of page 97
Let LT denote the loss in the transfer stage from relying on a local CEO. LT is equal to LT = p H η (1 η )[ θ H ( θ H J θ L + 2( J 1) θ L ( θ H θ L ) J | {z } example< 0 ) ( θ H θ L θ 2 L ) | {z } sacrifice> 0 ] (10) . LT < 0 follows from result 5. 3.4.2 Local Conditions λ i = { λ H , λ L } captures the inefficiency of local conditions. It may be high, with probability q H , or low, with probability 1 q H . This parameter is common to all local workers and captures aspects of the cultural, political and legal local conditions. In particular, we assume that λ i is the marginal cost of effort of local workers in the execution stage.
Image of page 98
Image of page 99

You've reached the end of your free preview.

Want to read all 136 pages?

  • Spring '17
  • JAMES FENSKE

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask ( soon) You can ask (will expire )
Answers in as fast as 15 minutes
A+ icon
Ask Expert Tutors