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Incentives, Reputation and the Allocation of Authority

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  • Florian Englmaier
  • Ales Filipi
  • Ravi Singh

Abstract

We address the question how much authority a principal should delegate to a manager with conflicting interests and uncertain ability in a context in which the manager has both compensation-based and reputational incentives. The optimal level of authority balances the value of the manager's decision-making expertise against the cost of ensuring that the manager uses his discretion productively. Reputational incentives reduce the necessary monetary incentives to discourage purely opportunistic behavior, but may cause the manager to pursue conservative courses of action to preserve his reputation. This undermines the benefits of delegating control, leading to decreased managerial authority and stronger monetary incentives. When the principal can commit to long-term contracts, she eliminates this conservative bias by rewarding a successful manager with greater future compensation and authority than would be optimal in a static setting. Early in the relationship the principal may delegate additional authority in order to screen for managers of high ability.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2979.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_2979

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Keywords: agency problems; delegation; compensation contracts; job design; career concerns; managerial conservatism;

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Cited by:
  1. Miriam Schütte & Philipp Christoph Wichardt, 2013. "Delegation and Interim Performance Evaluation," CESifo Working Paper Series 4193, CESifo Group Munich.
  2. Miriam Schütte & Philipp C. Wichardt, 2012. "Delegation in Long-Term Relationships," SOEPpapers on Multidisciplinary Panel Data Research 480, DIW Berlin, The German Socio-Economic Panel (SOEP).

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