Nadav Levy Research / Teaching / CV / Contact Info
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Research Interests
Industrial Organization ,
Economics of Organization
Published Papers (abstracts / no abstracts)
Commitment,
Exchange Autonomy and the Boundary of the Hierarchical Firm
Journal of Law, Economics and Organization ,
Vol. 24, No. 1 184-214.
click here for an earlier
(extended) working paper
Abstract: In this paper I present a theory of the
boundary of the firm that accounts for some important characteristics of
real-world multidivisional firms: operative decisions are in the hands of
middle managers who are rewarded based on the performance of their units;
managers' decisions are subject to approval and intervention by the top
management of the firm; and managers are better informed regarding the affairs
of their divisions. In this setup, the integration of an intermediate input
supplier and its buyer as separate divisions within a single firm is desirable,
as long as the choice of trading partners can be credibly delegated to the
divisions' managers. I show that this is satisfied not only under the
assumption of full commitment by the general office of the firm, but also,
remarkably, if it has no commitment power whatsoever. An explanation of the
boundary of the firm emerges only if the general office retains some limited
commitment power. I show that the general office mandates internal trades in
more instances than would have been optimal with full commitment, adversely
affecting the levels of investment undertaken by the divisions' managers. In
such cases, it can be optimal to have the trade conducted between
non-integrated parties.
Completed Papers
Make vs. Buy Externalities and the Organization of Supplier
Networks
Latest version: 6/2007
Abstract: I study how the make-or-buy decision of a firm
depends on the organization of its peers, in a model with multiple buyers and
suppliers. Interdependencies between different firms stems from the fact that
suppliers may achieve economies of scope by taking designs from several firms,
amortizing parts of the setup costs over a large group of clients. These
savings are passed through to the buyers, provided that they share suppliers.
Because of these externalities, the efficiency of outsourcing increases with
number of outsourcing firms. In contrast, integrated buyers are denied these
benefits, as outsourcing buyers eschew inefficient integrated suppliers.
Multiple organizational equilibria are possible, the
all-outsourcing equilibrium Pareto-superior when exists and more likely in
larger markets. I also characterize the equilibrium size of supplier networks
under outsourcing and show that it increases in the size of the market and in
the relative importance of the buyer's investment.
Government's Credit-Rating Concerns and the Privatization
of Public Projects
Latest version: 3/2009
Abstract
: This paper examines how credit
rating considerations affect government decisions whether to privatize public
projects. Assets directly owned by the government should have a beneficial
effect on the financing costs of its debt, as their expected future revenues
increase debtholders' confidence in the government's ability to meet its
obligations. We show, however, that there exist inherent barriers that prevent
the government from harnessing the full revenue-generating potential of its
assets in order to improve its credit rating. Privatization thus emerges as an
alternative that better exploits the revenue potential of public projects. This
beneficial financing role, however, comes at the cost of an excessive reduction
in projects' social benefits. Moreover, the mere option to privatize causes the
credit market to suspect that the revenue prospects of non-privatized projects
are bleak. This obliges the government to privatize some projects that it would
otherwise have preferred to keep to itself and even to
dismiss desirable projects.
Technology
Sharing and Tacit Collusion
Latest version: 1/2009
Abstract: This paper studies the prospects for collusion in
situations where rival firms share technological information. Two common forms
of technology sharing are compared: a research joint venture (RJV) and
licensing. Under licensing, the level of the licensing fee can be used to
elicit higher levels of R&D than with an RJV, which suffers from the
free-rider problem. Compared to an RJV however, firms must also be induced to
license the innovations ex post. For a broad set of market setups, including
the Bertrand competition and examples of the Cournot competition in which
innovations are relatively minor, licensing yields higher collusive profits. In
such markets collusion is therefore possible in more cases with licensing than
with an RJV. In other cases, however, the need to induce licensing limits the
effectiveness of using the license fee to improve investment: Collusion is only
possible if the license fee is set very high, which leads to excessive
investments (from the firms' standpoint) and lower collusive profits. In these
cases the firms prefer to collude using an RJV.
Principal's
Experience and the Authority Relation
Coming soon….
Abstract: I study the effect of a principal's
experience on the allocation of decision-making between him and his agents. In
contrast with the implications of earlier work on authority relations, I show
that an increase in the principal's experience may actually increase the share
of decisions made by the agent (his real authority). Furthermore, if experience
facilities the transmission of hard information from the agent to the
principal, an increase in the principal's experience can lead to an increase in
the agent's overall performance and the organization's output.
On
the Informational Benefits of a Conflict over Transfer Prices
(available
upon request)
Abstract: This paper provides formal foundations to Eccles
(1985) finding that a conflict within vertically integrated firms over the
transfer price of an internally traded good, is common and even encouraged. We
show that when contracting within the firm is subject to both moral hazard and
adverse selection, it is beneficial for the firm to have each of the trading
divisions eliciting supply and purchase bids from external sources, even if
internal trade is superior. Bids collected by one of the divisions are
positively correlated with the other division's private information and allow
the central office of the firm to "tighten its control" over the
division managers, lowering their information rents and increasing their
targeted effort. We characterize the compensation required in order to induce
the division managers to search for bids and discuss the conditions under which
it may involve the central office centrally determining a transfer price of the
internally traded input contingent on the presented external information, and
compensating the divisions on their net gains.
Work in Progress
Product Ratings and the
Incentives for
Partial Vertical Integration,
(joint with David Gilo and Yossi
Spiegel)
Interconnection quality as a
strategic variable: An empirical study of
Internet backbones (with Oded Bizan)
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