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Abstract: An uninformed principal elicits non-contractible recommendations from a privately informed agent regarding the quality of projects. The agent is biased in favor of implementation and no credible communication is possible in a one-shot setting. In a repeated setting, the fear of losing future influence can sustain informative communication, but the agent's willingness to remain truthful depends on the extent to which he expects the principal to listen to him. In a stationary equilibrium, the principal always implements mediocre projects at a sub-optimally high frequency to reward honesty, while she may either favor or discriminate against high-quality projects. In a non-stationary equilibrium, the principal will further condition the agent's future influence on today's proposals, with the admission of mediocre alternatives rewarded with increased future influence while rejections of high-quality projects are further punished by lowering the agent's future influence. The acceptance of high-quality projects builds up influence when the agent's current influence is not too high, but erodes the influence when the agent is already highly influential.

Rantakari (2022), "Good Things Come To Those Who Wait? Project Selection under Advocacy and Durable Projects"

Abstract: An uninformed principal chooses among competing proposals under competitive advocacy. When a proposal is accepted, it remains active for an uncertain amount of time, creating benefits for the principal and the advocate whose project was selected, while preventing the implementation of other proposals. The option value to wait for better alternatives creates an incentive to delay acceptance if all current alternatives are sufficently bad, but the advocates may be tempted to push a suboptimal alternative through to pre-empt the other advocate from doing the same. When the first-best (truth-telling by the advocates and optimal implementation thresholds) is not attainable, the principal will strategically coarsen communication, lower the threshold for acceptable projects and, if the agents are impatient enough, choose an asymmetric organizational structure where one of the advocates will have priority in getting proposals accepted. When early (but costly) termination of projects becomes possible, the equilibrium can exhibit both too much or to little termination of projects to manage the pre-emption motive of the advocates.

Lo and Rantakari (2017), "Effort and Compensation in Relational Contracts"

Abstract: To generate downstream sales, manufacturers often spend both effort and compensation when working with their dealers. Existing theories are inconclusive about the interdependent role of the two kinds of instruments in motivating dealer effort; that is, whether they are substitutes or complements. There is little empirical evidence to inform their relations either. We first examine the conditions that determine the interdependencies among monetary compensation – both formal and informal – and manufacturer effort in a game-theoretical framework. We show that monetary compensation and manufacturer effort are complementary instruments in motivating dealer effort if the manufacturer’s effort is primarily about monitoring. They become substitutes when the manufacturer’s effort is primarily productive and thus provides indirect compensation. We then empirically illustrate some of these novel predictions in the distribution channel of the leading manufacturer of a computer accessory and its sixty dealerships in China. In particular, evidence from company archival and survey data shows complementarity between informal compensation and manufacturer effort in motivating dealer effort. This result appears to hold only when the dealers are situated in highly relational contexts. Theoretical and managerial implications are drawn from our analyses.

Inactive papers:

Ozbas and Rantakari (2014), "Resource Allocation and Managerial Incentives"

Abstract: A manager's incentives to acquire information about different investment alternatives and then to choose how to allocate resources among them are jointly influenced by his compensation contract and the level of resources allocated to him. We show that the optimal compensation contract induces investment allocations that are more aggressive than the first-best allocation conditional on available information, while the optimal level of resources may be set above or below the first-best level, depending on whether desired total investment increases or decreases with the precision of acquired information. Both types of equilibrium investment distortions are used to motivate further information acquisition by the manager. Finally, we show how the choice of the level of resources can be delegated to the manager without any loss in efficiency through appropriately linking managerial compensation to the level of resources requested.

Rantakari (2008), "Uncertainty, Delegation and Incentives"

Abstract: How does imperfect contractibility of preferences influence the governance of a contractual relationship? We analyze a two-party decision-making problem where the optimal decision is unknown at the time of contracting. In consequence, instead of contracting on the decision directly, the parties need to design a contract that will induce good decision-making in the future. We examine how environmental uncertainty, quality of available performance measures and interim access to information influence the joint determination of the allocation of authority, use of performance pay and direct controls. We use the results from the model to cast light on (i) the conflicting empirical evidence on the risk-incentives tradeoff found in work on executive compensation and franchising, (ii) complementarities in organizational design and (iii) the determinants of the choice to delegate.