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Contract Complexity, Incentives, and the Value of Delegation

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Author Info
Nahum Melumad
Dilip Mookherjee
Stefan Reichelstein

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Abstract

In settings where the revelation principle applies, delegation arrangements are frequently inferior to centralized decision making, and at best achieve the same level of performance. This paper studies the value of delegation when organizations are constrained by a bound on the number of contingencies in any contract. For a principal-agent setting with asymmetric information, we compare centralized mechanisms where the principal retains sole responsibility for contracting and coordinating production, with delegation mechanisms where one agent (a manager) is delegated authority to contract with other agents and coordinate production. Relative to centralization, delegation entails a control loss, but allows decisions to be more sensitive to the manager's private information. We identify circumstances under which the flexibility gain outweighs the control loss, so that delegation emerges superior to centralized contracting. Copyright (c) 1997 Massachusetts Institute of Technology.

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Article provided by Blackwell Publishing in its journal Journal of Economics & Management Strategy.

Volume (Year): 6 (1997)
Issue (Month): 1 (06)
Pages: 257-289
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Handle: RePEc:bla:jemstr:v:6:y:1997:i:1:p:257-289

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  1. Ulf Schiller, 1999. "Information management and transfer pricing," European Accounting Review, Taylor and Francis Journals, vol. 8(4), pages 655-673, December. [Downloadable!] (restricted)
  2. Oliver Gürtler, 2005. "On Delegation under Relational Contracts," Bonn Econ Discussion Papers bgse32_2005, University of Bonn, Germany. [Downloadable!]
  3. Pranab Bardhan & Dilip Mookherjee, 2005. "Decentralization, Corruption and Government Accountability: An Overview," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-152, Boston University - Department of Economics. [Downloadable!]
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  4. Nobuo Yoshida, 2000. "The Optimal Combination of Corruption Reforms: Is a Comprehensive Approach a Good Idea?," Econometric Society World Congress 2000 Contributed Papers 1335, Econometric Society. [Downloadable!]
  5. Hendriks, Jean & Lockwood, Ben, 2005. "Decentralization and Electoral Accountability : Incentives, Separation, and Voter Welfare," The Warwick Economics Research Paper Series (TWERPS) 729, University of Warwick, Department of Economics. [Downloadable!]
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  6. M. Martin Boyer & Jörg Schiller, 2003. "Merging Automobile Insurance Regulatory Bodies: The Case of Atlantic Canada," CIRANO Working Papers 2003s-70, CIRANO. [Downloadable!]
  7. Currie, David & Levine, Paul L & Rickman, Neil, 1999. "Delegation and the Ratchet Effect: Should Regulators Be Pro-Industry?," CEPR Discussion Papers 2274, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  8. Michael Kuhn, 2006. "Delegating budgets when agents care about autonomy," Thuenen-Series of Applied Economic Theory 69, University of Rostock, Institute of Economics, Germany. [Downloadable!]
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  9. M. Martin Boyer, 2004. "On the Use of Hierarchies to Complete Contracts when Players Have Limited Abilities," CIRANO Working Papers 2004s-41, CIRANO. [Downloadable!]
  10. Timothy Van Zandt, 1997. "Real-Time Hierarchical Resource Allocation," Discussion Papers 1231, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  11. Stefan Ambec, 2003. "A Theory of Authority in Bilateral Contracting," CSEF Working Papers 102, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy. [Downloadable!]
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  12. Matejka, M. & De Waegenaere, A., 2000. "Organizational design and management accounting change," Discussion Paper 61, Tilburg University, Center for Economic Research. [Downloadable!]
  13. Grüner, Hans Peter, 2007. "Protocol Design and (De-)Centralization," CEPR Discussion Papers 6357, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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