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Organization of Project Evaluation and Implementation under Moral Hazard

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  • Peter-J. Jost
  • Frauke Lammers

Abstract

We examine the optimal organizational form of project evaluation and implementation under moral hazard. In the evaluation phase, two fallible risk-neutral agents sequentially screen projects. The approved projects are subsequently implemented in the development phase. We show that moral hazard renders the organization as a polyarchy less attractive than as a hierarchy. Furthermore, given moral hazard, task assignment becomes relevant: For identical agents, the principal always delegates implementation to the agent who works first in the evaluation phase.

Suggested Citation

  • Peter-J. Jost & Frauke Lammers, 2010. "Organization of Project Evaluation and Implementation under Moral Hazard," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 166(2), pages 212-238, June.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(201006)166:2_212:oopeai_2.0.tx_2-u
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    References listed on IDEAS

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    1. Maria De Paola & Vincenzo Scoppa, 2006. "Organizational Design, Project Selection, and Incentives," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 162(3), pages 424-449, September.
    2. Koh Winston T. H., 1992. "Variable evaluation costs and the design of fallible hierarchies and polyarchies," Economics Letters, Elsevier, vol. 38(3), pages 313-318, March.
    3. Sah, Raaj Kumar & Stiglitz, Joseph E, 1986. "The Architecture of Economic Systems: Hierarchies and Polyarchies," American Economic Review, American Economic Association, vol. 76(4), pages 716-727, September.
    4. Laux, Christian, 2001. "Limited-Liability and Incentive Contracting with Multiple Projects," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 514-526, Autumn.
    5. Patrick W. Schmitz, 2005. "Allocating Control in Agency Problems with Limited Liability and Sequential Hidden Actions," RAND Journal of Economics, The RAND Corporation, vol. 36(2), pages 318-336, Summer.
    6. Thomas P. Gehrig, 2004. "Organizational Form and Information Acquisition," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 160(1), pages 39-51, March.
    7. Fahad Khalil & Doyoung Kim & Dongsoo Shin, 2006. "Optimal Task Design: To Integrate or Separate Planning and Implementation?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(2), pages 457-478, June.
    8. David P. Baron & David Besanko, 1992. "Information, Control, and Organizational Structure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(2), pages 237-275, June.
    9. Hirao, Yukiko, 1993. "Task Assignment and Agency Structures," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 2(2), pages 299-323, Summer.
    10. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
    11. Gehrig, Thomas & Régibeau, Pierre & Rockett, Katharine, 1998. "Project Evaluation and Organizational Form," CEPR Discussion Papers 1888, C.E.P.R. Discussion Papers.
    12. Hans Gersbach & Uwe Wehrspohn, 1998. "Organizational design with a budget constraint," Review of Economic Design, Springer;Society for Economic Design, vol. 3(2), pages 149-157.
    13. Peter-J. Jost & Frauke Lammers, 2009. "The organization of project evaluation under competition," Review of Managerial Science, Springer, vol. 3(2), pages 141-155, July.
    14. Visser, Bauke, 2000. "Organizational communication structure and performance," Journal of Economic Behavior & Organization, Elsevier, vol. 42(2), pages 231-252, June.
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    Cited by:

    1. Emma Hubert, 2023. "Continuous-time incentives in hierarchies," Finance and Stochastics, Springer, vol. 27(3), pages 605-661, July.
    2. Emma Hubert, 2020. "Continuous-time incentives in hierarchies," Papers 2007.10758, arXiv.org.
    3. Zhaolin Li & Steven Q. Lu & Jennifer K. Ryan & Daewon Sun, 2021. "Impact of Organizational Structure on Development Strategy under Equity‐Based Incentives," Production and Operations Management, Production and Operations Management Society, vol. 30(4), pages 984-996, April.

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    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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