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Delegation of Authority as an Optimal (In)complete Contract

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  • Andreas Roider

Abstract

The present paper aims to contribute to the literature on the foundations of incomplete contracts by providing conditions under which simple delegation of authority is the solution to the complete-contracting problem of the parties. We consider a hold-up framework where both parties profit from an investment that raises the value of an asset. Delegation turns out to be optimal if (i) the decision-dependent parts of the payoffs of the parties are linear in the asset value, and (ii) decisions have no investment-independent effect. If overinvestment might be an issue, delegation, however, with restricted competencies is optimal if some additional continuity requirements are met.

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File URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonedp/bgse8_2003.pdf
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Bibliographic Info

Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse8_2003.

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Length: 21
Date of creation: May 2003
Date of revision: Aug 2004
Handle: RePEc:bon:bonedp:bgse8_2003

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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de

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Keywords: delegation; decentralization; authority; incomplete contracts; holdup; property rights;

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References

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Cited by:
  1. Theilen, Bernd, 2009. "Decentralization and the Gains from Monitoring," Working Papers 2072/42863, Universitat Rovira i Virgili, Department of Economics.
  2. 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.
  3. Pietro Alessandrini & Andrea F. Presbitero & Alberto Zazzaro, 2007. "Banks, distances, and financing constraints for firms," Proceedings 1053, Federal Reserve Bank of Chicago.

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