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Risk, Delegation, and Project Scope

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Author Info
Andreas Roider () (University of Bonn, CEPR and IZA)

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Abstract

This paper studies a partial-contracting model where an agent may provide effort to increase a project’s scope before some later decisions have to be taken. Consistent with existing empirical evidence, we find a positive relationship between exogenous risk and delegation. That is, we show that only if exogenous risk is sufficiently large, the risk-neutral principal may prefer to delegate authority over decisions to the risk-averse agent. Intuitively, for incentive reasons, the principal may optimally want to allow the agent to reduce his risk exposure. Nevertheless, even endogenous risk may be higher when the risk-averse agent has control.

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Publisher Info
Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3117.

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Length: 23 pages
Date of creation: Oct 2007
Date of revision:
Handle: RePEc:iza:izadps:dp3117

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Related research
Keywords: delegation; authority; risk; partial contracting;

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Find related papers by JEL classification:
D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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References listed on IDEAS
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  8. Nahum D. Melumad & Dilip Mookherjee, 1989. "Delegation as Commitment: The Case of Income Tax Audits," RAND Journal of Economics, The RAND Corporation, vol. 20(2), pages 139-163, Summer. [Downloadable!] (restricted)
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  17. Raghuram G Rajan & Julie Wulf, 2006. "The Flattening Firm: Evidence from Panel Data on the Changing Nature of Corporate Hierarchies," The Review of Economics and Statistics, MIT Press, vol. 88(4), pages 759-773, November. [Downloadable!] (restricted)
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  18. May, Don O, 1995. " Do Managerial Motives Influence Firm Risk Reduction Strategies?," Journal of Finance, American Finance Association, vol. 50(4), pages 1291-1308, September. [Downloadable!] (restricted)
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