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Organizational Design, Project Selection, and Incentives

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Author Info
Maria De Paola
Vincenzo Scoppa

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Abstract

This paper compares benefits and costs related to hierarchical and decentralized organizations in an agency framework. We show that the relative efficiency of hierarchy diminishes in contexts with asymmetric information. When effort is not observable, performance-related pay is required in order to encourage the agent to work hard. With risk-averse agents the use of this incentive system is more costly under hierarchy rather than under decentralization, in that a higher wage is necessary to elicit effort. From the efficiency comparison of hierarchy and delegation, a trade-off emerges between the advantages deriving from the principal's screening activity and the higher agency costs that this induces.

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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: 424-449
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Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200609)162:3_424:odpsai_2.0.tx_2-b

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Related research
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Find related papers by JEL classification:
D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

Cited by:
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  1. Maria De Paola & Vincenzo Scoppa, 2009. "Task assignment, incentives and technological factors," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 30(1), pages 43-55. [Downloadable!]
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This page was last updated on 2009-12-10.

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