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Delegation and incentives

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  • Helmut Bester
  • Daniel Krähmer

Abstract

This article analyzes the relation between authority and incentives. It extends the standard principal-agent model by a project selection stage in which the principal can either delegate the choice of project to the agent or keep the authority. The agent's subsequent choice of effort depends both on monetary incentives and the selected project. We find that the consideration of effort incentives makes the principal less likely to delegate the authority over projects to the agent. In fact, if the agent is protected by limited liability, delegation is never optimal. Copyright (c) 2008, RAND.

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Bibliographic Info

Article provided by RAND Corporation in its journal The RAND Journal of Economics.

Volume (Year): 39 (2008)
Issue (Month): 3 ()
Pages: 664-682

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Handle: RePEc:bla:randje:v:39:y:2008:i:3:p:664-682

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  1. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
  2. Bester, Helmut, 2005. "Externalities, Communication and the Allocation of Decision Rights," CEPR Discussion Papers 5391, C.E.P.R. Discussion Papers.
  3. Riordan, Michael H & Sappington, David E M, 1987. "Information, Incentives, and Organizational Mode," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 243-63, May.
  4. Wouter Dessein, 2002. "Authority and Communication in Organizations," Review of Economic Studies, Oxford University Press, vol. 69(4), pages 811-838.
  5. Russell Cooper & T.W. Ross, 1984. "Product Warranties and Double Moral Hazard," Cowles Foundation Discussion Papers 716, Cowles Foundation for Research in Economics, Yale University.
  6. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
  7. Susan Athey & John Roberts, 2001. "Organizational Design: Decision Rights and Incentive Contracts," American Economic Review, American Economic Association, vol. 91(2), pages 200-205, May.
  8. Sanford Grossman & Oliver Hart, . "An Analysis of the Principal-Agent Problem," Rodney L. White Center for Financial Research Working Papers 15-80, Wharton School Rodney L. White Center for Financial Research.
  9. Canice Prendergast, 2002. "The Tenuous Trade-off between Risk and Incentives," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1071-1102, October.
  10. Sugato Bhattacharyya & Francine Lafontaine, 1995. "Double-Sided Moral Hazard and the Nature of Share Contracts," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 761-781, Winter.
  11. Crawford, Vincent P & Sobel, Joel, 1982. "Strategic Information Transmission," Econometrica, Econometric Society, vol. 50(6), pages 1431-51, November.
  12. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February.
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Cited by:
  1. Bester, Helmut & Krähmer, Daniel, 2013. "Exit Options and the Allocation of Authority," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 401, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  2. Miriam Schütte & Philipp Christoph Wichardt, 2013. "Delegation and Interim Performance Evaluation," CESifo Working Paper Series 4193, CESifo Group Munich.
  3. Charness, Gary & Cobo-Reyes, Ramon & Lacomba, Juan A & Lagos, Francisco & Perez, Jose M, 2013. "Social comparisons in wage delegation: Experimental evidence," University of California at Santa Barbara, Economics Working Paper Series qt8j55h1xj, Department of Economics, UC Santa Barbara.
  4. Friehe, Tim, 2013. "Tempting righteous citizens? Counterintuitive effects of increasing sanctions in the realm of organized crime," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 44(C), pages 37-40.
  5. DeVaro, Jed & Prasad, Suraj, 2013. "The Relationship Between Delegation and Incentives Across Occupations: Evidence and Theory," Working Papers 2013-05, University of Sydney, School of Economics.
  6. Heikki Rantakari, 2012. "Employee Initiative and Managerial Control," American Economic Journal: Microeconomics, American Economic Association, vol. 4(3), pages 171-211, August.
  7. Matthias Kräkel, 2013. "Authority and Incentives in Organizations," Bonn Econ Discussion Papers bgse03_2013, University of Bonn, Germany.
  8. Jakub Kastl & David Martimort & Salvatore Piccolo, 2008. "Delegation and R&D Spending: Evidence from Italy," CSEF Working Papers 192, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 17 Oct 2009.
  9. Tymofiy Mylovanov & Andriy Zapechelnyuk, 2010. "Decision Rules for Experts with Opposing Interests," Working Papers 674, Queen Mary, University of London, School of Economics and Finance.

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