“There’s no such thing as a free lunch” runs the old adage. But is there? And/or, should or shouldn’t there be? Similar questions are addressed in a new paper from Benjamin E. Hermalin, (Thomas and Alison Schneider Distinguished Professor of Finance and Professor, Department of Economics at the Haas School of Business, University of California, Berkeley, US) in a new paper for The Journal of Law, Economics, & Organization, entitled: Why Whine about Wining and Dining?
The professor discusses the pros and cons of such business practices, their legality, and potential advantages or disadvantages to the firms concerned – concluding:
“This paper provides a rationalization for firms funding their managers wining and dining (more, generally, gift or favor exchange): wining & dining, even when itself the source of agency problems, can be a less expensive way for firms to induce their managers to cooperate with each other than utilizing standard incentive contracts. In particular, because the managers can observe what the firms’ owners cannot, delegating to the managers the authority to make discretionary transfers to each other allows the owners to avoid or reduce the informational rents they would otherwise be stuck paying their managers.”
Also noting that :
“[…] wining & dining need not be taken literally; in particular, there are far more valuable gifts (e.g., positions on boards of directors, employing family members ) that can be bestowed.”
Note: A version of the paper is available in full here.
Question (optional): ‘The second comma in the journal’s title is redundant – discuss.’