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Externalities, Communication and the Allocation of Decision Rights

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  • Helmut Bester

    ()
    (Free University of Berlin, Department of Economics)

Abstract

This paper views authority as the right to undertake decisions that impose externalities on other members of the organization. When only decision rights can be contractually assigned to one of the organization's stakeholders, the optimal assignment minimizes the resulting inefficiencies by giving control rights to the party with the highest stake in the organization's decisions. Under asymmetric information, the efficient allocation of authority depends on the communication of private information. In the case of multiple decision areas, divided control rights may enhance organizational efficiency unless there exist complementarities between different decisions.

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Paper provided by Departmental Working Papers in its series Papers with number 027.

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Handle: RePEc:bef:lsbest:027

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Keywords: Authority; Decision Rights; Externalities; Incomplete Contracts; Imperfect Information; Theory of the Firm;

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Citations

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Cited by:
  1. Bester, Helmut & Krähmer, Daniel, 2013. "Exit options and the allocation of authority," Discussion Papers 2013/5, Free University Berlin, School of Business & Economics.
  2. Marco Francesconi & Abhinay Muthoo, 2011. "Control Rights In Complex Partnerships," Journal of the European Economic Association, European Economic Association, vol. 9(3), pages 551-589, 06.
  3. Kovác, Eugen & Krähmer, Daniel, 2013. "Optimal Sequential Delegation," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 427, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  4. Bester, Helmut & Krähmer, Daniel, 2006. "Delegation and incentives," Discussion Papers 2007/1, Free University Berlin, School of Business & Economics.
  5. Lim, Wooyoung, 2012. "Selling authority," Journal of Economic Behavior & Organization, Elsevier, vol. 84(1), pages 393-415.
  6. Francesconi, Marco & Muthoo, Abhinay, 2006. "Control Rights in Public-Private Partnerships," IZA Discussion Papers 2143, Institute for the Study of Labor (IZA).
  7. Luigi Marengo & Corrado Pasquali, 2010. "How to get what you want when you do not know what you want. A model of incentives, organizational structure and learning," LEM Papers Series 2010/08, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  8. Puschke, Kerstin, 2007. "Optimal hierarchies with diverse decision-makers," Discussion Papers 2007/10, Free University Berlin, School of Business & Economics.
  9. Kerstin Puschke, . "The Allocation of Authority under Limited Liability," Papers 029, Departmental Working Papers.

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