AbstractHow should a principal delegate a task to an agent? This paper studies the choice of an agent's discretion as a contracting problem. We show that the agent's freedom of action can be used as an effective incentive device: the agent's initiative is determined by the discretion he has in decision making. Due to this incentive effect the relationship between the severity of the conflict of principal's and agent's interests and the agent's optimal discretion in decision making is potentially non-monotonic: it may be optimal to curtail a subordinate's authority over decision making even if there are no conflicting interests concerning that decision. Our theory provides a rationale for commonly observed phenomena such as ''demanding clear statements'' from advisors or ''imposing an innovation bias'' on an organizational structure.
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Bibliographic InfoPaper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 0749.
Date of creation: 01 Aug 2000
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- Jean Tirole, 1999. "Incomplete Contracts: Where Do We Stand?," Econometrica, Econometric Society, vol. 67(4), pages 741-782, July.
- Roider, Andreas, 2004.
"Delegation of Authority as an Optimal (In)complete Contract,"
IZA Discussion Papers
1298, Institute for the Study of Labor (IZA).
- Andreas Roider, 2006. "Delegation of Authority as an Optimal (In)Complete Contract," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 162(3), pages 391-411, September.
- Andreas Roider, 2003. "Delegation of Authority as an Optimal (In)complete Contract," Bonn Econ Discussion Papers bgse8_2003, University of Bonn, Germany, revised Aug 2004.
- Krähmer, Daniel, 2002. "Delegation versus authority," Discussion Papers, Research Unit: Market Processes and Governance FS IV 02-26, Social Science Research Center Berlin (WZB).
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