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Delegation of Authority as an Optimal (In)Complete Contract

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Author Info
Andreas Roider

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Abstract

This paper contributes to the literature on the foundations of incomplete contracts. In a holdup framework, we provide two sets of conditions under which simple delegation of authority is the solution to the complete-contracting problem. In cases where overinvestment can be ruled out, delegation is optimal if the payoffs of the parties satisfy certain separability conditions. If overinvestment might be an issue, delegation (possibly with restricted competencies) is optimal if additionally some continuity requirements are met. The paper also contributes to the literature on delegation, where such replication results have previously been derived in settings with asymmetric information.

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Publisher Info
Article provided by Mohr Siebeck, Tübingen in its journal Journal of Institutional and Theoretical Economics.

Volume (Year): 162 (2006)
Issue (Month): 3 (September)
Pages: 391-411
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Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200609)162:3_391:doaaao_2.0.tx_2-n

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Segal, Ilya, 1999. "Complexity and Renegotiation: A Foundation for Incomplete Contracts," Review of Economic Studies, Blackwell Publishing, vol. 66(1), pages 57-82, January. [Downloadable!] (restricted)
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    Other versions:
  4. Baliga, Sandeep & Sjostrom, Tomas, 2001. "Optimal Design of Peer Review and Self-Assessment Schemes," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 27-51, Spring.
    Other versions:
  5. Itoh Hideshi, 1993. "Coalitions, Incentives, and Risk Sharing," Journal of Economic Theory, Elsevier, vol. 60(2), pages 410-427, August. [Downloadable!] (restricted)
  6. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 2002. "On partial contracting," European Economic Review, Elsevier, vol. 46(4-5), pages 745-753, May. [Downloadable!] (restricted)
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  8. Andreas Roider, 2004. "Asset Ownership and Contractibility of Interaction," RAND Journal of Economics, The RAND Corporation, vol. 35(4), pages 787-802, Winter.
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  9. Georg Nöldeke & Klaus M. Schmidt, 1992. "Option Contracts and Renegotiation - A Solution to the Hold-Up Problem," Discussion Paper Serie A 417, University of Bonn, Germany, revised Aug 1993.
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  11. Dezso Szalay, 2000. "Optimal Delegation," Econometric Society World Congress 2000 Contributed Papers 0749, Econometric Society. [Downloadable!]
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  14. Maskin, Eric & Tirole, Jean, 1999. "Two Remarks on the Property-Rights Literature," Review of Economic Studies, Blackwell Publishing, vol. 66(1), pages 139-49, January. [Downloadable!] (restricted)
  15. 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. [Downloadable!] (restricted)
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  18. Armstrong, M., 1994. "Delegation and Discretion," Discussion Paper Series In Economics And Econometrics 9421, Economics Division, School of Social Sciences, University of Southampton.
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  19. Ilya Segal & Michael D. Whinston, 2002. "The Mirrlees Approach to Mechanism Design with Renegotiation (with Applications to Hold-up and Risk Sharing)," Econometrica, Econometric Society, vol. 70(1), pages 1-45, January. [Downloadable!] (restricted)
  20. Christoph Lülfesmann, 2001. "Limited Liability and Option Contracts in Models with Sequential Investments," Bonn Econ Discussion Papers bgse27_2001, University of Bonn, Germany. [Downloadable!]
  21. Edlin, Aaron S & Hermalin, Benjamin E, 2000. "Contract Renegotiation and Options in Agency Problems," Journal of Law, Economics and Organization, Oxford University Press, vol. 16(2), pages 395-423, October.
  22. Baliga, Sandeep & Sjostrom, Tomas, 1998. "Decentralization and Collusion," Journal of Economic Theory, Elsevier, vol. 83(2), pages 196-232, December. [Downloadable!] (restricted)
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  23. Urs Schweizer, 2000. "An Elementary Approach to the Hold-Up Problem with Renegotiation," Bonn Econ Discussion Papers bgse15_2000, University of Bonn, Germany. [Downloadable!]
  24. Jean Tirole, 1999. "Incomplete Contracts: Where Do We Stand?," Econometrica, Econometric Society, vol. 67(4), pages 741-782, July.
  25. Edlin, Aaron S & Reichelstein, Stefan, 1996. "Holdups, Standard Breach Remedies, and Optimal Investment," American Economic Review, American Economic Association, vol. 86(3), pages 478-501, June. [Downloadable!] (restricted)
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  26. Crawford, Vincent P & Sobel, Joel, 1982. "Strategic Information Transmission," Econometrica, Econometric Society, vol. 50(6), pages 1431-51, November. [Downloadable!] (restricted)
  27. 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. [Downloadable!] (restricted)
  28. Nahum D. Melumad & Toshiyuki Shibano, 1991. "Communication in Settings with No. Transfers," RAND Journal of Economics, The RAND Corporation, vol. 22(2), pages 173-198, Summer. [Downloadable!] (restricted)
  29. Dessein, Wouter, 2002. "Authority and Communication in Organizations," Review of Economic Studies, Blackwell Publishing, vol. 69(4), pages 811-38, October.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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. [Downloadable!]
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