On Evaluation Costs in Strategic Factor Markets: The Implications for Competition and Organizational Design

T paper uses a formal model to study how evaluation costs affect competition for resources in strategic factor markets. It finds that relative scarcity may not always benefit resource sellers. Rather, when competition among resource investors passes a certain threshold intensity, miscoordination among investors increases to the point that sellers’ expected profits decline. This paper extends the model to consider how investors organize to overcome managerial agency in resource evaluation. Two organizational designs are considered: (a) incentivization, wherein a lower-level manager is motivated by an incentive contract to evaluate resources for an investor, and (b) supervision, wherein evaluation is either handled directly or closely monitored by headquarters. The model suggests that competition among investors will be associated with a greater use of supervision and that investors using supervision will tend to make lower offers. This paper also finds that supervision will be more common when valuable resources are rare.