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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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  1. Williamson, Oliver E, 1981. "The Modern Corporation: Origins, Evolution, Attributes," Journal of Economic Literature, American Economic Association, vol. 19(4), pages 1537-68, December.
  2. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 2002. "On partial contracting," European Economic Review, Elsevier, Elsevier, vol. 46(4-5), pages 745-753, May.
  3. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Scholarly Articles 4554125, Harvard University Department of Economics.
  4. Wouter Dessein, 2000. "Authority and Communication in Organizations," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 1747, Econometric Society.
  5. Veikko Thiele, 2013. "Subjective Performance Evaluations, Collusion, and Organizational Design," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 29(1), pages 35-59, February.
  6. Chongwoo Choe & Shingo Ishiguro, 2012. "On the Optimality of Multi-tier Hierarchies: Coordination versus Motivation," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 28(3), pages 486-517, August.
  7. Bester, Helmut & Krahmer, Daniel, 2007. "Delegation and Incentives," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6042, C.E.P.R. Discussion Papers.
  8. Spulber,Daniel F., 2009. "The Theory of the Firm," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521517386.
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  12. Innes, Robert D., 1990. "Limited liability and incentive contracting with ex-ante action choices," Journal of Economic Theory, Elsevier, Elsevier, vol. 52(1), pages 45-67, October.
  13. Kräkel, Matthias & Schöttner, Anja, 2012. "Internal labor markets and worker rents," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 84(2), pages 491-509.
  14. 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.
  15. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, Elsevier, vol. 29(1), pages 1-21, February.
  16. 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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(2), pages 433-452, 05.
  17. Ricardo Alonso & Wouter Dessein & Niko Matouschek, 2008. "When Does Coordination Require Centralization? Corrigendum," American Economic Review, American Economic Association, American Economic Association, vol. 98(3), pages 1195-96, June.
  18. Ricardo Alonso & Wouter Dessein & Niko Matouschek, 2008. "When Does Coordination Require Centralization?," American Economic Review, American Economic Association, American Economic Association, vol. 98(1), pages 145-79, March.
  19. Schmitz, Patrick W., 2013. "Job design with conflicting tasks reconsidered," European Economic Review, Elsevier, Elsevier, vol. 57(C), pages 108-117.
  20. Yeon-Koo Che & Seung-Weon Yoo, 2001. "Optimal Incentives for Teams," American Economic Review, American Economic Association, American Economic Association, vol. 91(3), pages 525-541, June.
  21. Heikki Rantakari, 2008. "Governing Adaptation -super-1," Review of Economic Studies, Oxford University Press, vol. 75(4), pages 1257-1285.
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