Resource Evaluation, the Business Environment, and Managerial Agency

Abstract

This paper uses a formal model to study how firms evaluate and compete to acquire resources in strategic factor markets. It finds that, unlike in a typical market for goods and services, competition among resource investors to acquire strategic resources may not always benefi t resource sellers. Rather, when the level of competition passes a certain threshold, miscoordination among investors increases to the point that sellers expected pro ts decline. In fact, it may sometimes benefi t sellers for competition among investors to be muted to the point that investors earn a positive return. The paper extends the model to consider how investors organize to overcome managerial agency in resource evaluation. Two organizational designs are considered: (a) incentivization, wherein a lower-level manager is motivated by an incentive contract to make good resource acquisition decisions for an investor, and (b) supervision, wherein the acquisition decision is either handled directly or closely monitored by headquarters. The model suggests that competition among investors will be associated with a greater use of supervision, and that investors using supervision will tend to make lower offers. The paper also fi nds that supervision will be more common when valuable resources are rare.