Economics Insights @ CBS

We study the impact of limited inventory on optimal sales-force compensation contracts. We adopt a principal-agent framework, characterized by limited liability and rent sharing with the agent. A commonly invoked assumption in the inventory management literature is that the demand distribution satisfies the increasing failure rate (IFR) property. Under this assumption, however, past research has established that a quota-bonus contract—a widely adopted sales-force compensation contract in the practice—cannot sustain in equilibrium.

In sponsored search advertising, advertisers bid to be displayed in response to a keyword search. The operational activities associated with participating in an auction, i.e., submitting the bid and the ad copy, customizing bids and ad copies based on various factors (such as the geographical region from which the query originated, the time of day and the season, the characteristics of the searcher), and continuously measuring outcomes, involve considerable effort. We call the costs that arise from such activities keyword management costs.

Reviewing a fascinating range of evidence, Y. Jenny Xiao, Geraldine Coppin, and Jay J. Van Bavel (this issue) propose reciprocal links between intergroup psychology and perception. In so doing they consolidate an emerging body which resurrects and refreshes the “New Look” stance that social needs and expectations have a top-down influence on perceptions, not only social perceptions but also perceptions of the physical world.

In a dynamic setting with demand following a random process, we ask how investment and operating decisions can be delegated to a manager with unknown time preferences. Only the manager observes the demand realization in each period and, therefore, has private information when choosing whether to acquire the productive asset and, subsequently, how to utilize it. We derive accrual accounting-based performance measures under which the manager will make the efficient decisions provided the investment date is exogenously given.