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Delegation of Authority as an Optimal (In)complete Contract

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  • Roider, Andreas

    ()
    (University of Regensburg)

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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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1298.

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Length: 24 pages
Date of creation: Sep 2004
Date of revision:
Handle: RePEc:iza:izadps:dp1298

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Keywords: hold-up; delegation; decentralization; authority; property rights; incomplete contracts;

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References

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  1. Wouter Dessein, 2000. "Authority and Communication in Organizations," Econometric Society World Congress 2000 Contributed Papers 1747, Econometric Society.
  2. Nöldeke, Georg & Schmidt, Klaus M., 1995. "Option contracts and renegotiation: A solution to the Hold-Up Problem," Munich Reprints in Economics 19329, University of Munich, Department of Economics.
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  6. Dezso Szalay, 2000. "Optimal Delegation," Econometric Society World Congress 2000 Contributed Papers 0749, Econometric Society.
  7. Ilya Segal & Michael D. Whinston, 2002. "The Mirrlees Approach to Mechanism Design with Renegotiation (with Applications to Hold-up and Risk Sharing)," Econometrica, Econometric Society, vol. 70(1), pages 1-45, January.
  8. Armstrong, Mark, 1995. "Delegation and discretion," MPRA Paper 17069, University Library of Munich, Germany.
  9. Hart, Oliver D. & Moore, John, 2005. "On the Design of Hierarchies: Coordination Versus Specialization," Scholarly Articles 3448676, Harvard University Department of Economics.
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  19. Edlin, Aaron S & Reichelstein, Stefan, 1996. "Holdups, Standard Breach Remedies, and Optimal Investment," American Economic Review, American Economic Association, vol. 86(3), pages 478-501, June.
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Citations

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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 PRESBITERO & Alberto ZAZZARO, 2006. "Banks, Distances and Financing Constraints for Firms," Working Papers 266, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.

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