30 If a local manager is relied upon he knows � iand can obtain first best

# 30 if a local manager is relied upon he knows ? iand

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30 If a local manager is relied upon, he knows λ i and can obtain first best level of effort from workers. 31 On the contrary, if an expatriate is relied upon, he ignores local conditions and can only obtain second best level of effort. We derive the optimal contract in the case in which workers are able to collude against the manager. The appendix includes the optimal contract, a direct revelation mechanism, when workers are unable to collude, that achieves first best. 32 In the appendix we also show that if the expatriate manager offered the contract designed by the local CEO, workers would have incentives to fool him and extract rents from him. In particular, they would work as if local ineﬃciency was always high, that is λ i = λ H . The expatriate manager will offer a state contingent contract, ( w e j , e e j ) for j = H, L in order to maximize expected profits, E [ e ], s.t participation and incentive constrains, IR L , IR H , IC L , IC H . 33 In particular, he will offer 30 An alternative interpretation is that λ i reﬂects the ineﬃciency of local suppliers. 31 The first best contract he offers and its derivation is available in the appendix. 32 The assumption that collusion is impossible and that the manager relies on the “shot them all mechanism” is unrealistic and uninteresting. 33 The derivation is included in the appendix. 18
w e H = λ H 1 4[ λ H λ L q H + λ L ] 2 (11) and w e L = ( λ H λ L ) 1 4[ λ H λ L q H + λ L ] 2 + 1 4 λ L (12) with e e L = 1 2 λ L e e H = 1 2[ λ H - λ L q H + λ L ] Expected output per worker when an expatriate CEO is hired is equal to E [ e e ] = q H ( 1 2[ λ H λ L q H + λ L ] ) + (1 q H )( 1 2 λ L ) (13) and the difference in expected output between an expatriate and a local CEO is E [ e e ] E [ e l ] = q H ( e e H e l H | {z } < 0 ) + (1 q H )( e e L e l L | {z } =0 ) (14) Result 7: In the execution stage the expatriate secures as much effort from local workers as the local CEO when local ineﬃciency is low, but less effort when local ineﬃciency is high. 34 Therefore, expected output is lower under an expatriate manager. Result 8: Higher local uncertainty increases the expected output loss in the execution stage derived from relying on an expatriate CEO (relative to a local CEO) The expected wage bill when an expatriate is relied upon is equal to 34 This result is known as “eﬃciency at the top”. 19
E [ w e ] = q H ( λ H 1 4[ λ H λ L q H + λ L ] 2 ) + (1 q H )(( λ H λ L ) 1 4[ λ H λ L q H + λ L ] 2 + 1 4 λ L ) (15) and the difference in expected wage between an expatriate and a local CEO is equal to E [ w e ] E [ w l ] = q H ( w e H w l H | {z } < 0 ) + (1 q H )( w e L w l L | {z } > 0 ) (16) Result 9: The expatriate CEO pays workers more than the local CEO when ineﬃciency is low. When ineﬃciency is high, the expatriate CEO pays workers less than the local CEO. The expected profit per worker is equal to E e ] = q H ( 1 2[ λ H λ L q H + λ L ] λ H 1 4[ λ H λ L q H + λ L ] 2 )+(1 q H )( 1 4 λ L ( λ H λ L ) 1 4[ λ H λ L q H + λ L ] 2 ) (17) Result 10: Expected profits in the execution stage under an expatriate manager are a decreasing and convex function of q h and of λ H .

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• Spring '17
• JAMES FENSKE

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