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Authority and Incentives in Organizations

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  • Kräkel, Matthias

Abstract

The paper analyzes the choice of organizational structure as solution to the trade-off between controlling behavior based on authority rights and minimizing costs for implementing high efforts. The analysis includes the owner of a firm, a top manager and two division heads. If it is more expensive to incentivize the division heads, the owner will prefer full delegation of authority to them to replace their high incentive pay by incentives based on private benefits of control. In that situation, decentralization is optimal given that selfish behavior is more important than cooperation for maximizing returns, but concentrated delegation of full authority to a single division head is optimal for cooperation being crucial. If, however, incentivizing the division heads is clearly less expensive than creating incentives for the top manager, the owner will choose centralization given that cooperation is the dominating issue, but partial delegation if selfish behavior is crucial.

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Bibliographic Info

Paper provided by Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 412.

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Date of creation: 2013
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Handle: RePEc:trf:wpaper:412

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Keywords: authority; centralization; contracts; decentralization; moral hazard.;

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References

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  1. Mathias Dewatripont & Philippe Aghion & Patrick Rey, 2002. "On partial contracting," ULB Institutional Repository 2013/9627, ULB -- Universite Libre de Bruxelles.
  2. Schmitz, Patrick W., 2012. "Job design with conflicting tasks reconsidered," MPRA Paper 36914, University Library of Munich, Germany.
  3. Aghion, Philippe & Tirole, Jean, 1994. "Formal and Real Authority in Organizations," IDEI Working Papers 37, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Dessein, Wouter, 2002. "Authority and Communication in Organizations," Review of Economic Studies, Wiley Blackwell, vol. 69(4), pages 811-38, October.
  5. Ricardo Alonso & Wouter Dessein & Niko Matouschek, 2008. "When Does Coordination Require Centralization? Corrigendum," American Economic Review, American Economic Association, vol. 98(3), pages 1195-96, June.
  6. Veikko Thiele, 2013. "Subjective Performance Evaluations, Collusion, and Organizational Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 29(1), pages 35-59, February.
  7. Bester, Helmut & Krahmer, Daniel, 2007. "Delegation and Incentives," CEPR Discussion Papers 6042, C.E.P.R. Discussion Papers.
  8. Kräkel, Matthias & Schöttner, Anja, 2012. "Internal labor markets and worker rents," Journal of Economic Behavior & Organization, Elsevier, vol. 84(2), pages 491-509.
  9. Spulber,Daniel F., 2009. "The Theory of the Firm," Cambridge Books, Cambridge University Press, number 9780521517386, October.
  10. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February.
  11. Susanne Ohlendorf & Patrick W. Schmitz, 2012. "Repeated Moral Hazard And Contracts With Memory: The Case Of Risk‐Neutrality," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(2), pages 433-452, 05.
  12. Patrick W. Schmitz, 2005. "Allocating control in agency problems with limited liability and sequential hidden actions," Bonn Econ Discussion Papers bgse27_2005, University of Bonn, Germany.
  13. Ricardo Alonso & Wouter Dessein & Niko Matouschek, 2008. "When Does Coordination Require Centralization?," American Economic Review, American Economic Association, vol. 98(1), pages 145-79, March.
  14. Heikki Rantakari, 2008. "Governing Adaptation -super-1," Review of Economic Studies, Oxford University Press, vol. 75(4), pages 1257-1285.
  15. Chongwoo Choe & Shingo Ishiguro, 2012. "On the Optimality of Multi-tier Hierarchies: Coordination versus Motivation," Journal of Law, Economics and Organization, Oxford University Press, vol. 28(3), pages 486-517, August.
  16. Schmitz, Patrick W., 2005. "Should Contractual Clauses that Forbid Renegotiation Always be Enforced?," CEPR Discussion Papers 5292, C.E.P.R. Discussion Papers.
  17. Yeon-Koo Che & Seung-Weon Yoo, 2001. "Optimal Incentives for Teams," American Economic Review, American Economic Association, vol. 91(3), pages 525-541, June.
  18. Joaquín Poblete & Daniel Spulber, 2012. "The form of incentive contracts: agency with moral hazard, risk neutrality, and limited liability," RAND Journal of Economics, RAND Corporation, vol. 43(2), pages 215-234, 06.
  19. Williamson, Oliver E, 1981. "The Modern Corporation: Origins, Evolution, Attributes," Journal of Economic Literature, American Economic Association, vol. 19(4), pages 1537-68, December.
  20. Innes, Robert D., 1990. "Limited liability and incentive contracting with ex-ante action choices," Journal of Economic Theory, Elsevier, vol. 52(1), pages 45-67, October.
  21. Thiele, Veikko, 2007. "Subjective Performance Evaluation and Collusion," MPRA Paper 2472, University Library of Munich, Germany.
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