3 essays in applied microeconomics

Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2001.Includes bibliographical references.When a contract is signed between two economic agents, it is likely to produce some effect on non-contracting, third parties and provide new information to the contracting parties. This thesis examines how such third party externality and newly generated information should affect the initial form of the contract. In the first essay, a headquarters of a firm designs a mechanism with which it extracts the division managers' superior information about the external market opportunities. The information allows the headquarters to provide optimal investment incentive to the managers and make efficient trading decisions. The essay provides a justification for a real-world headquarters, who delegates all the operating decisions to the division managers but maintains the ultimate authority within the firm. The second essay examines how a client would contract with her lawyer to provide best incentive to the lawyer and maximize her return from litigation. By providing different contingent shares based on settlement and judgment, she is able to provide better incentive without diluting her return from litigation. At the same time, when she has relatively poor bargaining leverage against the counter party, the essay shows that delegating the settlement authority to the lawyer and leaving him a large rent would be more beneficial for the client. The third essay analyzes the salary contracting problem faced by the owner of a firm who is aware of a potential opportunity to sell her firm in the future. The essay demonstrates that when the owner grants a large severance payment to the employee, she would be able to defer the compensation burden to the potential buyer and increase her net return from the firm.by Albert H. Choi.Ph.D