IDEAS home Printed from https://ideas.repec.org/a/bpj/bejtec/v11y2011i1n2.html
   My bibliography  Save this article

Information, Authority, and Corporate Hierarchies

Author

Listed:
  • Choe Chongwoo

    (Monash University)

  • Park In-Uck

    (University of Bristol)

Abstract

This paper studies a model with one principal and two agents where one agent can gather information that is valuable for the principal's project choice and the other agent provides effort to the chosen project. Defining authority as the right to choose a project and contract with the agent who does not directly contract with the principal, we ask when the principal can benefit from delegating authority to one of the agents. We show that beneficial delegation is possible when complete contracts cannot be written and authority is delegated to the information gatherer. The benefits of delegation stem from either efficiency gains or reduction in rent to the information gatherer. This can be viewed as a reasonable portrayal of a typical corporate hierarchy where top managers are delegated the authority to make strategic decisions and to contract with other employees.

Suggested Citation

  • Choe Chongwoo & Park In-Uck, 2011. "Information, Authority, and Corporate Hierarchies," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 11(1), pages 1-39, February.
    • Handle: RePEc:bpj:bejtec:v:11:y:2011:i:1:n:2
    DOI: 10.2202/1935-1704.1706
    as

    Download full text from publisher

    File URL: https://doi.org/10.2202/1935-1704.1706
    Download Restriction: For access to full text, subscription to the journal or payment for the individual article is required.
    File URL: https://libkey.io/10.2202/1935-1704.1706?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Chongwoo Choe & Gloria Tian & Xiangkang Yin, 2008. "Managerial Power, Stock-Based Compensation, And Firm Performance: Theory And Evidence," Monash Economics Working Papers 21/08, Monash University, Department of Economics.
    2. Oliver E. Williamson, 1967. "Hierarchical Control and Optimum Firm Size," Journal of Political Economy, University of Chicago Press, vol. 75(2), pages 123-123.
    3. Itoh Hideshi, 1993. "Coalitions, Incentives, and Risk Sharing," Journal of Economic Theory, Elsevier, vol. 60(2), pages 410-427, August.
    4. Itoh, Hideshi, 1992. "Cooperation in Hierarchical Organizations: An Incentive Perspective," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 8(2), pages 321-345, April.
    5. Dilip Mookherjee, 2006. "Decentralization, Hierarchies, and Incentives: A Mechanism Design Perspective," Journal of Economic Literature, American Economic Association, vol. 44(2), pages 367-390, June.
    6. Yingyi Qian, 1994. "Incentives and Loss of Control in an Optimal Hierarchy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(3), pages 527-544.
    7. Cremer, Jacques & Khalil, Fahad & Rochet, Jean-Charles, 1998. "Strategic Information Gathering before a Contract Is Offered," Journal of Economic Theory, Elsevier, vol. 81(1), pages 163-200, July.
    8. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 301-325, June.
    9. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 1-29, February.
    10. Inés Macho‐Stadler & J. David Pérez‐Castrillo, 1998. "Centralized and Decentralized Contracts in a Moral Hazard Environment," Journal of Industrial Economics, Wiley Blackwell, vol. 46(4), pages 489-510, December.
    11. Antoine Faure-Grimaud & Jean-Jacques Laffont & David Martimort, 2003. "Collusion, Delegation and Supervision with Soft Information," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(2), pages 253-279.
    12. Cremer, Jacques & Khalil, Fahad, 1992. "Gathering Information before Signing a Contract," American Economic Review, American Economic Association, vol. 82(3), pages 566-578, June.
    13. Guido Friebel & Michael Raith, 2010. "Resource Allocation and Organizational Form," American Economic Journal: Microeconomics, American Economic Association, vol. 2(2), pages 1-33, May.
    14. Choe, Chongwoo, 1998. "Contract design and costly verification games," Journal of Economic Behavior & Organization, Elsevier, vol. 34(2), pages 327-340, February.
    15. Wouter Dessein, 2002. "Authority and Communication in Organizations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 69(4), pages 811-838.
    16. Oliver Hart & John Moore, 2005. "On the Design of Hierarchies: Coordination versus Specialization," Journal of Political Economy, University of Chicago Press, vol. 113(4), pages 675-702, August.
    17. Nahum D. Melumad & Dilip Mookherjee & Stefan Reichelstein, 1995. "Hierarchical Decentralization of Incentive Contracts," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 654-672, Winter.
    18. Heikki Rantakari, 2008. "Governing Adaptation -super-1," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(4), pages 1257-1285.
    19. Jean-Jacques Laffont & David Martimort, 1998. "Collusion and Delegation," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 280-305, Summer.
    20. McAfee, R Preston & McMillan, John, 1995. "Organizational Diseconomies of Scale," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(3), pages 399-426, Fall.
    21. Cremer, Jacques & Khalil, Fahad, 1994. "Gathering information before the contract is offered: The case with two states of nature," European Economic Review, Elsevier, vol. 38(3-4), pages 675-682, April.
    22. Ricardo Alonso & Wouter Dessein & Niko Matouschek, 2008. "When Does Coordination Require Centralization?," American Economic Review, American Economic Association, vol. 98(1), pages 145-179, March.
    23. Wouter Dessein & Luis Garicano & Robert Gertner, 2010. "Organizing for Synergies," American Economic Journal: Microeconomics, American Economic Association, vol. 2(4), pages 77-114, November.
    24. Nahum Melumad & Dilip Mookherjee & Stefan Reichelstein, 1997. "Contract Complexity, Incentives, and the Value of Delegation," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(1), pages 257-289, June.
    25. Rafael La Porta & Florencio Lopez‐De‐Silanes & Andrei Shleifer, 1999. "Corporate Ownership Around the World," Journal of Finance, American Finance Association, vol. 54(2), pages 471-517, April.
    26. Timothy van Zandt, 1999. "Real-Time Decentralized Information Processing as a Model of Organizations with Boundedly Rational Agents," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(3), pages 633-658.
    27. Friebel, Guido & Raith, Michael, 2006. "Resource Allocation and Firm Scope," IZA Discussion Papers 2249, Institute of Labor Economics (IZA).
    28. 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.
    29. Timothy Van Zandt & Roy Radner, 1998. "Real-Time Decentralized Information Processing and Returns to Scale," Discussion Papers 1233, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    30. Choe Chongwoo & Park In-Uck, 2011. "Information, Authority, and Corporate Hierarchies," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 11(1), pages 1-39, February.
    31. Baliga, Sandeep & Sjostrom, Tomas, 1998. "Decentralization and Collusion," Journal of Economic Theory, Elsevier, vol. 83(2), pages 196-232, December.
    32. Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563, Elsevier.
    33. Choe, Chongwoo & Ishiguro, Shingo, 2008. "On the (Sub)optimality of Multi-tier Hierarchies: Coordination versus Motivation," MPRA Paper 13451, University Library of Munich, Germany.
    34. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-264, April.
    35. Richard J. Gilbert & Michael H. Riordan, 1995. "Regulating Complementary Products: A Comparative Institutional Analysis," RAND Journal of Economics, The RAND Corporation, vol. 26(2), pages 243-256, Summer.
    36. Dilip Mookherjee & Masatoshi Tsumagari, 2004. "The Organization of Supplier Networks: Effects of Delegation and Intermediation," Econometrica, Econometric Society, vol. 72(4), pages 1179-1219, July.
    37. David P. Baron & David Besanko, 1992. "Information, Control, and Organizational Structure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(2), pages 237-275, June.
    38. Myerson, Roger B., 1982. "Optimal coordination mechanisms in generalized principal-agent problems," Journal of Mathematical Economics, Elsevier, vol. 10(1), pages 67-81, June.
    39. Core, John E. & Guay, Wayne R., 2001. "Stock option plans for non-executive employees," Journal of Financial Economics, Elsevier, vol. 61(2), pages 253-287, August.
    40. Melumad, Nahum & Mookherjee, Dilip & Reichelstein, Stefan, 1992. "A theory of responsibility centers," Journal of Accounting and Economics, Elsevier, vol. 15(4), pages 445-484, December.
    41. Chongwoo Choe & Shingo Ishiguro, 2012. "On the Optimality of Multi-tier Hierarchies: Coordination versus Motivation," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 28(3), pages 486-517, August.
    42. Radner, Roy, 1993. "The Organization of Decentralized Information Processing," Econometrica, Econometric Society, vol. 61(5), pages 1109-1146, September.
    43. Baron, David P & Besanko, David, 1992. "Information, Control, and Organizational Structure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(2), pages 237-275, Summer.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Holger Strulik & Klaus Prettner & Alexia Prskawetz, 2013. "The past and future of knowledge-based growth," Journal of Economic Growth, Springer, vol. 18(4), pages 411-437, December.
    2. John Foster, 2015. "Energy, Knowledge and Economic Growth," Economic Complexity and Evolution, in: Andreas Pyka & John Foster (ed.), The Evolution of Economic and Innovation Systems, edition 127, pages 9-39, Springer.
    3. Carl‐Johan Dalgaard & Holger Strulik, 2016. "Physiology and Development: Why the West is Taller Than the Rest," Economic Journal, Royal Economic Society, vol. 126(598), pages 2292-2323, December.
    4. DAVIS Colin & HASHIMOTO Ken-ichi, 2012. "R&D Subsidies International Knowledge Dispersionand Fully Endogenous Productivity Growth," ESRI Discussion paper series 288, Economic and Social Research Institute (ESRI).
    5. Choe Chongwoo & Park In-Uck, 2011. "Information, Authority, and Corporate Hierarchies," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 11(1), pages 1-39, February.
    6. Chih-Hai Yang & Chia-Hui Huang, 2013. "Is Taiwan's R&D productivity in decline? A microeconometric analysis," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 14(1), pages 137-155, February.
    7. Banerjee, Rajabrata & Roy, Saikat Sinha, 2014. "Human capital, technological progress and trade: What explains India's long run growth?," Journal of Asian Economics, Elsevier, vol. 30(C), pages 15-31.
    8. Colin Davis & Ken-Ichi Hashimoto, 2015. "Industry Concentration, Knowledge Diffusion and Economic Growth Without Scale Effects," Economica, London School of Economics and Political Science, vol. 82(328), pages 769-789, October.
    9. David I. Stern and Astrid Kander, 2012. "The Role of Energy in the Industrial Revolution and Modern Economic Growth," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    10. Finn Martensen, 2013. "Globalization, Unemployment, and Product Cycles: Short- and Long-Run Effects," Working Paper Series of the Department of Economics, University of Konstanz 2013-16, Department of Economics, University of Konstanz.
    11. Chongwoo Choe & Shingo Ishiguro, 2022. "Relational Contracts and Hierarchy," Monash Economics Working Papers 2022-08, Monash University, Department of Economics.
    12. Mellon, Vicky & Bramwell, Bill, 2018. "The temporal evolution of tourism institutions," Annals of Tourism Research, Elsevier, vol. 69(C), pages 42-52.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Choe, Chongwoo & Ishiguro, Shingo, 2008. "On the (Sub)optimality of Multi-tier Hierarchies: Coordination versus Motivation," MPRA Paper 13451, University Library of Munich, Germany.
    2. Chongwoo Choe & In-Uck Park, 2008. "Information Gathering, Delegated Contracting And Corporate Hierarchies," Monash Economics Working Papers 19/08, Monash University, Department of Economics.
    3. Choe, Chongwoo, 2002. "Delegated Contracting and Corporate Hierarchies," CEI Working Paper Series 2002-7, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
    4. Jonathan Treussard, 2005. "Life-Cycle Consumption Plans and Portfolio Policies in a Heath-Jarrow-Morton Economy," Boston University - Department of Economics - Working Papers Series WP2005-033, Boston University - Department of Economics.
    5. Junichiro Ishida, 2015. "Hierarchies Versus Committees: Communication and Information Acquisition in Organizations," The Japanese Economic Review, Japanese Economic Association, vol. 66(1), pages 62-88, March.
    6. Shen, Jim Huangnan & Zhang, Jun & Lee, Chien-Chiang & Li, Weiping, 2020. "Toward an internal governance structure of China’s large SOEs," Journal of Asian Economics, Elsevier, vol. 70(C).
    7. Theilen, Bernd, 1965-, 2011. "Decentralization of contracts with interim sidecontracting," Working Papers 2072/169684, Universitat Rovira i Virgili, Department of Economics.
    8. Nicholas Bloom & Raffaella Sadun, 2012. "The Organization of Firms Across Countries," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(4), pages 1663-1705.
    9. Theilen, Bernd, 2009. "Decentralization and the Gains from Monitoring," Working Papers 2072/42863, Universitat Rovira i Virgili, Department of Economics.
    10. Katayama, Hajime & Meagher, Kieron J. & Wait, Andrew, 2018. "Authority and communication in firms," Journal of Economic Behavior & Organization, Elsevier, vol. 155(C), pages 315-348.
    11. Bernd Theilen, 2012. "Decentralization of contracts with interim side-contracting," Theory and Decision, Springer, vol. 73(4), pages 561-590, October.
    12. Te Bao & Yongqin Wang, 2012. "Incomplete contract, bargaining and optimal divisional structure," Journal of Economics, Springer, vol. 107(1), pages 81-96, September.
    13. Elisabetta Iossa & David Martimort, 2012. "Risk allocation and the costs and benefits of public--private partnerships," RAND Journal of Economics, RAND Corporation, vol. 43(3), pages 442-474, September.
    14. Nicholas Bloom & Luis Garicano & Raffaella Sadun & John Van Reenen, 2014. "The Distinct Effects of Information Technology and Communication Technology on Firm Organization," Management Science, INFORMS, vol. 60(12), pages 2859-2885, December.
    15. Antoine Faure-Grimaud & Jean-Jacques Laffont & David Martimort, 2000. "A Theory of Supervision with Endogenous Transaction Costs," Annals of Economics and Finance, Society for AEF, vol. 1(2), pages 231-263, November.
    16. Ricardo Alonso & Wouter Dessein & Niko Matouschek, 2008. "When Does Coordination Require Centralization?," American Economic Review, American Economic Association, vol. 98(1), pages 145-179, March.
    17. Migrow, Dimitri, 2021. "Designing communication hierarchies," Journal of Economic Theory, Elsevier, vol. 198(C).
    18. Maria Guadalupe & Julie Wulf, 2008. "The Flattening Firm and Product Market Competition: The Effect of Trade Liberalization," NBER Working Papers 14491, National Bureau of Economic Research, Inc.
    19. Dongsoo Shin & Roland Strausz, 2024. "Insourcing Vs Outsourcing in Vertical Structure," Rationality and Competition Discussion Paper Series 495, CRC TRR 190 Rationality and Competition.
    20. Pérez, Jessica Helen & Iranzo Sancho, Susana, 2012. "Determinants of Decentralization within the Firm: Some Empirical Evidence from Spanish Small and Medium- Sized Enterprise," Working Papers 2072/211755, Universitat Rovira i Virgili, Department of Economics.

    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bpj:bejtec:v:11:y:2011:i:1:n:2. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peter Golla (email available below). General contact details of provider: https://www.degruyter.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.