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saouma at ucla dot edu Mailing Address: D402 |
Richard E. Saouma Education BA Applied Math, Economics, Berkeley 12/00 PhD Business Research, GSB, Stanford 5/06 Statement My
research concerns the interaction of information, incentives, and most
recently, manufacturing. In 2008, I developed and tested an e-bay model which
I later folded into the Fiat Lux course Electronic Entrepreneurship to teach
undergraduates the value of economics, marketing and informed decision making
(accounting). The e-bay business model relied heavily on international
suppliers and buyers, and the problems that arose therein have been the focus
of my most recent research endeavors. Courses MGMT19 Electronic
Entrepreneurship, 2008-present Introduction
to business and economics via e-bay and craigslist. In this course, we first
identify why consumers shop electronically, and examine what works best. Reasonable
practices, pricing, and marketing are all discussed at length. Students are
asked to present a business plan at the start of the quarter, and a
(hopefully!) improved plan at the end of the quarter. 10 week, 1 unit course
with 5 2 hour meetings. Open exclusively to underclassmen. MGMT222 Managerial (useful)
Accounting 2006-present Course
is divided into two halves. The first half extensively examines the role of
information in decision making; e.g., what do you as a manager need to know to
make profit maximizing decisions? Course is specifically designed not
to be exclusive to corporate-bound students. In particular, I go to great
lengths to motivate the topics without making reference to corporate settings;
the information in the first half of this course is as valuable to a
controller at Dell, as it is to a women’s fashion designer in MGMT444B2 Applied
Management Research 2007-present Two
quarter consulting project wherein teams of graduate business students select
a sponsored project, and use the tools learned at Work In Progress (Ready for
Presentation) Window Dressing (with Jack Hughes), April 2009 We model the organizational practice of agents expending
effort to favorably bias performance measures; so-called window
dressing. When managers seek to
motivate productive hidden effort, measures subject to window dressing may
nonetheless provide useful contracting information. We provide a rationale
for accommodating such biasing behavior by characterizing settings where
dissuading window dressing proves more costly than the contracting
consequences associated with that activity. We find that as the performance
measurement system becomes sufficiently susceptible to window dressing bias
or when the agent’s private cost of window dressing is sufficiently small
relative to productive effort, then his incentive to window dress is high and
the principal optimally accommodates such behavior. Contrary to previous
studies of limited liability, we find that in the presence of window
dressing, the rents paid to the agent need not be increasing in his cost of
productive effort. More surprising, we find that the principal’s profits are
not monotone in the susceptibility of the
information system to window dressing. The implication is that organizations
may prefer information systems more prone to window dressing bias over others
that are less prone; contrary to conventional wisdom. Incentive
Compensation and The Choice of Inventory Buffer (with Stan Baiman and Serguei Netessine), April 2009 An important issue in managerial accounting is the choice
of performance metrics and the weight to put on them for incentive
purposes. The appropriate choice of performance
metrics and compensation weights are clearly dependent on (and an integral
part of) the firm’s organizational design.
The purpose of this paper is to study the relation between
compensation weight and a particular part of a manufacturing firm’s
organizational design - the choice of inventory buffer size. We choose inventory buffer size as our
organizational design decision of interest because it plays a central role in
modern manufacturing practices such as the Toyota Production System (TPS). Following popular manufacturing trends,
manufacturers have slashed such buffers in hopes of attaining greater
productivity. By embedding a
traditional operations model of inventory within a principal-agent model, we
demonstrate that such decisions are not necessarily optimal from an incentive
perspective. We characterize the
optimal buffer size from an incentive perspective and derive a number of
empirically testable hypotheses. Past Research The Incentive Value
of Inventory and Cross-Training in Modern Manufacturing (with Madhav Rajan and Venky Nagar), April 2009 A key tenet of modern manufacturing practices such as
lower work-in-process (WIP) inventory policies and worker cross-training is
that they increase productivity through improved job-scheduling. We demonstrate
an additional productivity effect, namely improved control (of worker
behavior). We model a two-stage sequential production process in
which the downstream worker has private information about his station's
productivity that can be noisily observed by the upstream worker via
cross-training. Optimal production-based contracts in such settings rely on
WIP inventory and the extent of cross-training to elicit workers' private information.
This perspective of WIP as playing both a control and job-scheduling role
leads to new results: for example, the optimal production contract produces
inventory that is excessive from a pure scheduling perspective. Such
mediating productivity effects of the control role constitute a potential explanation for the
mixed empirical support for pure job-scheduling theories of modern
manufacturing practices. We also identify circumstances where the WIP buildup
cost of eliciting workers' information out each other is so high that it is
better to schedule workers independently even if they are informed about each
other. Resource Allocation
Auctions within Firms (with Stan Baiman, Paul Fischer and Madhav
Rajan), Journal of Accounting Research December 2007 There is growing
interest in the use of markets within firms. Proponents have noted that
markets are a simple and efficient mechanism for allocating resources in
economies in which information is dispersed. In contrast to the use of
markets in the broader economy, the efficiency of an internal
market is determined in large part by the endogenous
contractual incentives provided to the participating,
privately informed agents. In this paper, we study the optimal design of
managerial incentives when resources are allocated by an internal auction
market, as well as the efficiency of the resulting resource allocations. We
show that the internal auction market can achieve first-best resource
allocations and decisions, but only at an excessive cost in compensation
payments. We then identify conditions under which the internal auction market
and associated optimal incentive contracts achieve the benchmark second-best
outcome as determined using a direct revelation mechanism. The advantage of
the auction is that it is easier to implement than the direct revelation
mechanism. When the internal auction mechanism is unable to achieve
second-best, we characterize the factors that determine the magnitude of the
shortfall. Overall, our results speak to the robust performance of relatively
simple market mechanisms and associated incentive systems in resolving
resource allocation problems within firms. Optimal Second Stage
Outsourcing, Management Science, June 2008 Manufacturers
have recently begun outsourcing product assembly and completion tasks to their
suppliers. Such outsourcing solves several contracting problems, but
generates new incentive frictions between manufacturers and their suppliers.
In this paper, we analyze a manufacturer's decision to outsource an assembly
(second-stage) task to a pre-established supplier. We find that outsourcing second-stage tasks becomes more attractive as the cost of
either the first- or second-stage activity rises. Outsourcing becomes less
attractive when the supplier is unable to accept large levels of liability.
The manufacturer is shown to prefer more testing when she outsources assembly
to her supplier as opposed to when she assembles products in-house. Lastly,
we find that the contracting frictions identified persist when the supplier's work can
be tested individually, albeit imperfectly. Optimal Information Asymmetry (with Madhav Rajan), The
Accounting Review May 2006 At the heart of decentralization lies the notion that
tasks are delegated by owners to managers who possess superior local
information. The extent of this
information asymmetry is often an endogenous construct, as it is influenced
by the owner's choice of internal accounting systems and the manager's
investment in acquiring local expertise. In this paper, we explore how
varying levels of pre-contract, asymmetric information affect the
owner-manager relationship. We provide three main sets of insights. First, we
find that the owner's payoffs are initially decreasing, and strictly convex everywhere,
in the quality of the manager's private information. The owner thus prefers
to deal with either a perfectly informed or a perfectly uninformed manager,
and we characterize conditions for either to be the preferred choice. Second,
in contrast to recent work, we demonstrate that when information can be
communicated internally, the optimal strength of managerial incentives
unambiguously decreases as the manager becomes better informed. Third, we
derive the surprising result that a self-interested manager does not always
prefer to maximize his informational advantage. Our work has implications for
the optimal design of organizations, and for
internal accounting and control systems in particular. |
