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The Allocation of Authority under Limited Liability

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  • Kerstin Puschke

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

Abstract

Authority is modelled as the right to undertake a non-contractible decision in a joint project. We show that the allocation of authority depends on bargaining power and differences in both parties cost functions. The decision-maker is assumed to exert an externality on the other parties. Overall surplus is shared according to generalized Nash bargaining. Under limited liability, the agent with the larger cost parameter receives authority if the agents' cost parameters are very different. If the agents have similar cost parameters, bargaining power determines the allocation of authority. Possible applications include the introduction of a new product.

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Paper provided by Departmental Working Papers in its series Papers with number 029.

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Handle: RePEc:bef:lsbest:029

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Keywords: Authority; Decision Rights; Incomplete Contracts;

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  1. Helmut Bester, . "Externalities, Communication and the Allocation of Decision Rights," Papers 027, Departmental Working Papers.
  2. Wouter Dessein, 2002. "Authority and Communication in Organizations," Review of Economic Studies, Oxford University Press, vol. 69(4), pages 811-838.
  3. Oliver Hart & John Moore, 1988. "Property Rights and the Nature of the Firm," Working papers 495, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
  5. Aghion, Philippe & Tirole, Jean, 1994. "Formal and Real Authority in Organizations," IDEI Working Papers 37, Institut d'Économie Industrielle (IDEI), Toulouse.
  6. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
  7. Rajan, Raghuram G & Zingales, Luigi, 1998. "Power in a Theory of the Firm," CEPR Discussion Papers 1777, C.E.P.R. Discussion Papers.
  8. Baker, George & Gibbons, Robert & Murphy, Kevin J, 1999. "Informal Authority in Organizations," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(1), pages 56-73, April.
  9. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
  10. Aghion, Philippe & Bolton, Patrick, 1992. "An Incomplete Contracts Approach to Financial Contracting," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 473-94, July.
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Cited by:
  1. Bester, Helmut, 2005. "Externalities, communication and the allocation of decision rights," Discussion Papers 2005/21, Free University Berlin, School of Business & Economics.

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