Contract Complexity, Incentives and the Value of Delegation
AbstractIn settings where the revelation principle applies, delegation arrangements are frequently inferior to centralized decision making, and at best achieve the same level of performance. This paper studies the value of delegation when organizations are constrained by a bound on the number of contingencies in any contract. For a principal-agent setting with asymmetric information, we compare centralized mechanisms where the principal retains sole responsibility for contracting and coordinating production, with delegation mechanisms where one agent (a manager) is delegated authority to contract with other agents and coordinate production. Relative to centralization, delegation entails a control loss, but allows decisions to be more sensitive to the manager's private information. We identify circumstances under which the flexibility gain outweighs the control loss, so that delegation emerges superior to centralized contracting. Copyright (c) 1997 Massachusetts Institute of Technology.
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Bibliographic InfoPaper provided by Boston University - Industry Studies Programme in its series Papers with number 0070.
Date of creation: Sep 1996
Date of revision:
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Postal: Boston University, Industry Studies Program; Department of Economics, 270 Bay Road, Boston, Massachusetts 02215.
Web page: http://www.bu.edu/econ/isp/
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Other versions of this item:
- Nahum Melumad & Dilip Mookherjee & Stefan Reichelstein, 1997. "Contract Complexity, Incentives, and the Value of Delegation," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(1), pages 257-289, 06.
- Melamad, N. & Mookherjee, D. & Reichelstein, S., 1996. "Contract Complexity, Incentives and the Value of Delegation," Papers 70, Boston University - Industry Studies Programme.
- K10 - Law and Economics - - Basic Areas of Law - - - General (Constitutional Law)
- K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
- L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
- L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
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