Authority, Communication and Discrimination in Agency Models
This thesis develops three theoretical frameworks to investigate questions relating to authority within both firms and governments as well as discrimination in the labor market. The first chapter develops a theoretical framework that incorporates the deleterious effects of tournaments on cooperation in order to generate a more complete theory of the optimal organizational structure. I study how well information will be generated by the agents and utilized by the decision maker(s) in either a centralized or a decentralized setting. I show that tournaments can achieve what I refer to as the Constrained First Best outcome and will negatively impact cooperation only in a decentralized setting. This chapter also suggests that a limited liability constraint will increase the complementarity between decentralization and the agents' productivity. Furthermore, I argue that periods of economic contraction will favor a centralized setting and I uncover a trade-off between communication noise, which depresses centralized profits, and production noise, which depresses decentralized profits. Using a model with an overall population consisting of two different groups, the second chapter shows that imposing optimal constraints on the set of implementable policies based on demographics and misalignment of preferences increases social welfare. I also argue that the more misaligned the preferences of two groups are, the more restrictive these optimal constraints should be. When using these optimal constraints or no constraints at all, allocating power based on the plurality rule is optimal. However, if restrictive suboptimal constraints are utilized, then allocating power to a minority group becomes potentially optimal. Finally, I show that while overly-lax suboptimal constraints still increase welfare, overly-burdensome suboptimal constraints do so if the two groups' preferences are sufficiently misaligned. The third chapter provides a theoretical framework to compare two different hiring practices: an unpaid competitive internship which is followed by a potential job offer versus a standard series of interviews. After fully characterizing the optimal hiring process, I show that labor regulations that ban the use of unpaid internships or that prevent employers from giving truthful references can exacerbate the obstacles to employment of a community traditionally facing discrimination.