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Delegation and incentives

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  • Bester, Helmut
  • Krähmer, Daniel

Abstract

This paper analyses the relation between authority and incentives. It extends the standard principal / agent model by a project selection stage in which the principal can either delegate the choice of project to the agent or keep the authority. The agent's subsequent choice of e ort depends both on monetary incentives and the selected project. We nd that the consideration of e ort incentives makes the principal less likely to delegate the authority over projects to the agent. In fact, if the agent is protected by limited liability, delegation is never optimal. --

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Bibliographic Info

Paper provided by Free University Berlin, School of Business & Economics in its series Discussion Papers with number 2007/1.

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Date of creation: 2006
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Handle: RePEc:zbw:fubsbe:20071

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Keywords: Authority; delegation; incentives; moral hazard; principal / agent problem; limited liability;

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References

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  1. Wouter Dessein, 2002. "Authority and Communication in Organizations," Review of Economic Studies, Oxford University Press, vol. 69(4), pages 811-838.
  2. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 7(0), pages 24-52, Special I.
  3. Sugato Bhattacharyya & Francine Lafontaine, 1995. "Double-Sided Moral Hazard and the Nature of Share Contracts," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 761-781, Winter.
  4. Russell Cooper & Thomas W. Ross, 1985. "Product Warranties and Double Moral Hazard," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 103-113, Spring.
  5. Bester, Helmut, 2005. "Externalities, communication and the allocation of decision rights," Discussion Papers 2005/21, Free University Berlin, School of Business & Economics.
  6. Crawford, Vincent P & Sobel, Joel, 1982. "Strategic Information Transmission," Econometrica, Econometric Society, Econometric Society, vol. 50(6), pages 1431-51, November.
  7. Sanford J Grossman & Oliver D Hart, 2001. "An Analysis of the Principal-Agent Problem," Levine's Working Paper Archive 391749000000000339, David K. Levine.
  8. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, Elsevier, vol. 29(1), pages 1-21, February.
  9. Canice Prendergast, 2002. "The Tenuous Trade-off between Risk and Incentives," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 110(5), pages 1071-1102, October.
  10. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
  11. Riordan, Michael H & Sappington, David E M, 1987. "Information, Incentives, and Organizational Mode," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 102(2), pages 243-63, May.
  12. Susan Athey & John Roberts, 2001. "Organizational Design: Decision Rights and Incentive Contracts," American Economic Review, American Economic Association, American Economic Association, vol. 91(2), pages 200-205, May.
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Citations

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Cited by:
  1. DeVaro, Jed & Prasad, Suraj, 2013. "The Relationship Between Delegation and Incentives Across Occupations: Evidence and Theory," Working Papers, University of Sydney, School of Economics 2013-05, University of Sydney, School of Economics.
  2. Miriam Schütte & Philipp Christoph Wichardt, 2013. "Delegation and Interim Performance Evaluation," CESifo Working Paper Series 4193, CESifo Group Munich.
  3. Bester, Helmut & Krähmer, Daniel, 2013. "Exit Options and the Allocation of Authority," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 401, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  4. Kräkel, Matthias, 2013. "Authority and Incentives in Organizations," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 412, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  5. Tymofiy Mylovanov & Andriy Zapechelnyuk, 2010. "Decision Rules for Experts with Opposing Interests," Working Papers, Queen Mary, University of London, School of Economics and Finance 674, Queen Mary, University of London, School of Economics and Finance.
  6. Friehe, Tim, 2013. "Tempting righteous citizens? Counterintuitive effects of increasing sanctions in the realm of organized crime," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, Elsevier, vol. 44(C), pages 37-40.
  7. Charness, Gary & Cobo-Reyes, Ramon & Lacomba, Juan A & Lagos, Francisco & Perez, Jose M, 2013. "Social comparisons in wage delegation: Experimental evidence," University of California at Santa Barbara, Economics Working Paper Series qt8j55h1xj, Department of Economics, UC Santa Barbara.
  8. Jakub Kastl & David Martimort & Salvatore Piccolo, 2008. "Delegation and R&D Spending: Evidence from Italy," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 192, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 17 Oct 2009.
  9. Heikki Rantakari, 2012. "Employee Initiative and Managerial Control," American Economic Journal: Microeconomics, American Economic Association, American Economic Association, vol. 4(3), pages 171-211, August.

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