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Organizational Design, Project Selection, and Incentives

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Author Info

  • Maria De Paola
  • Vincenzo Scoppa

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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Bibliographic 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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Cited by:
  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.
  2. Peter-J. Jost & Frauke Lammers, 2010. "Organization of Project Evaluation and Implementation under Moral Hazard," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 166(2), pages 212-238, June.

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