The firm and managerial misdirection of worker effort


  • CR Gwin

    1. Economics Division, Babson College, Babson Park, MA 02457, USA Tel: 1 781 239 4373 Fax: 1 781 239 5239 E-mail:
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      I wish to thank the discussant, Carlos Ulibarri, and participants at the 72nd Annual Western Ecomomic Association International Conference; Eric Rasmusen; Scott Smart; Carol Gwin; and participants at an Indiana University Department of Business Economics and Public Policy seminar for their invaluable comments and assistance in the preparation of this work. Two anonymous referees made useful suggestions. Any errors are the sole responsibiliyy of the author.


This article models how a level of management between workers and the owner of a firm can affect the owner's decision either to internally integrate a function to make inputs or to contract out to buy inputs from an independent supplier. In the model, a self-serving manager can direct her workers to perform activities that serve her interests rather than those of the firm. This reduces the effectiveness of worker performance incentives intended to promote efforts that benefit the owner. Incentives may have to be increased to a level such that the owner prefers to buy inputs rather than make them internally.