48 We show that an expatriate CEO has incentives to fool workers It follows

# 48 we show that an expatriate ceo has incentives to

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48 We show that an expatriate CEO has incentives to fool workers. It follows that the HQ has the same incentives. 40
Anticipating this fact, workers will disregard any announcement from the CEO, and θ E ( µ ) = µθ H + (1 µ ) θ L . 49 A.2 Expatriate Leads by Sacrifice To transmit information on the value of the project credibly, the CEO can lead by sacrifice . For example, he can spend resources in training workers or give them a gift. Let b x ( θ i ) be the amount the manager sacrifices (side payments) as a function of the value of the technology. 50 To minimize the cost of transmitting information, he will only give workers a monetary gift when the true state is θ H . 51 If θ i = θ L , the leader makes no sacrifice, b x ( θ L ) = 0 and workers are certain that θ i = θ L . In that case, he and the rest of workers choose e = θ L J 1 - η . T L = (1 η ) θ 2 L . If θ i = θ H , the leader will make a sacrifice to convince workers that the true state is θ H . In particular, he will choose to give up a gift that would be too costly if the true state was θ L and workers believed it was θ H . That is, the CEO will choose b x ( θ H ) = { x | θ L ( 2( J 1) θ L + θ L 2( J 1 η ) 2 ) θ L ( 2( J 1) θ H + θ L 2( J 1 η ) 2 ) x } (22) The CEO will choose the minimum possible sacrifice, b x ( θ H ) = ( J 1) θ L ( θ H θ L ) ( J 1 η ) 2 (23) In that case, he and the rest of workers choose e = θ H J 1 - η and T H = θ 2 H (1 η ). 49 From Hermalin(1998): “Valuable information is not utilized, which is suboptimal relative to a situation in which the leader is induced to announce her information truthfully.” 50 In a dynamic extension of the model that we are working on training will have not only a signaling value but will increase workers human capital next period. Depending on the substitutability or complementarity of manager and workers effort in the transfer team production this will have consequences for the choice of the manager itself. The Mexican data we analyze reveals that firms with foreign workers spend more on general purpose training of workers with above bachelor degree. 51 This corresponds to the one shot least cost separating equilibrium analyzed in Hermalin(2007). 41
The expected value of the transfer stage if the CEO is an expatriate and leads by sacrifice is equal to: E ( T e | LS ) = (1 η )( p H θ 2 H + (1 p H ) θ 2 L ) (24) Assume that the expatriate manager can only lead by sacrifice. Who needs to sacrifice more to convince the local design team on the value of the project, the headquarter or the expatriate manager? The HQ will sacrifice more than the expatriate CEO if the following condition holds: η (1 η ) > J 1 J 2 (25) That is, if what the HQ appropriates out of fooling workers is higher than what the expatriate CEO does then the former needs to sacrifice more than the latter. This is so because he has more incentives to fool workers. If the HQ can choose η , then it will optimally set η = 1 2 and x e ( θ H ) < x HQ ( θ H ).

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• Spring '17
• JAMES FENSKE

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