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

# Local ceo headquarter leading by sacrifice if the ceo

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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
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
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.

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• Spring '17
• JAMES FENSKE

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