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Delegation and incentives

Author

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  • Helmut Bester
  • Daniel Krähmer

Abstract

This article analyzes 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 effort depends both on monetary incentives and the selected project. We find that the consideration of effort 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. Copyright (c) 2008, RAND.

Suggested Citation

  • Helmut Bester & Daniel Krähmer, 2008. "Delegation and incentives," RAND Journal of Economics, RAND Corporation, vol. 39(3), pages 664-682.
  • Handle: RePEc:bla:randje:v:39:y:2008:i:3:p:664-682
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    References listed on IDEAS

    as
    1. Helmut Bester, 2009. "Externalities, communication and the allocation of decision rights," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 269-296.
    2. Wouter Dessein, 2002. "Authority and Communication in Organizations," Review of Economic Studies, Oxford University Press, pages 811-838.
    3. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, pages 7-63.
    4. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, pages 7-45.
    5. Michael H. Riordan & David E. M. Sappington, 1987. "Information, Incentives, and Organizational Mode," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 243-263.
    6. Sugato Bhattacharyya & Francine Lafontaine, 1995. "Double-Sided Moral Hazard and the Nature of Share Contracts," RAND Journal of Economics, The RAND Corporation, pages 761-781.
    7. Russell Cooper & Thomas W. Ross, 1985. "Product Warranties and Double Moral Hazard," RAND Journal of Economics, The RAND Corporation, pages 103-113.
    8. Susan Athey & John Roberts, 2001. "Organizational Design: Decision Rights and Incentive Contracts," American Economic Review, American Economic Association, pages 200-205.
    9. 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, vol. 7(0), pages 24-52, Special I.
    10. Canice Prendergast, 2002. "The Tenuous Trade-off between Risk and Incentives," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1071-1102, October.
    11. Crawford, Vincent P & Sobel, Joel, 1982. "Strategic Information Transmission," Econometrica, Econometric Society, pages 1431-1451.
    12. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February.
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    Citations

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    Cited by:

    1. Heikki Rantakari, 2012. "Employee Initiative and Managerial Control," American Economic Journal: Microeconomics, American Economic Association, pages 171-211.
    2. T. Renee Bowen & George Georgiadis & Nicolas S. Lambert, 2016. "Collective Choice in Dynamic Public Good Provision," NBER Working Papers 22772, National Bureau of Economic Research, Inc.
    3. Tymofiy Mylovanov & Andriy Zapechelnyuk, 2010. "Decision Rules for Experts with Opposing Interests," Working Papers 674, Queen Mary University of London, School of Economics and Finance.
    4. Gary Charness & Ramón Cobo-Reyes & Juan A. Lacomba & Francisco Lagos & Jose Maria Perez, 2016. "Social comparisons in wage delegation: experimental evidence," Experimental Economics, Springer;Economic Science Association, vol. 19(2), pages 433-459, June.
    5. 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, vol. 44(C), pages 37-40.
    6. Jed De Varo & Suraj Prasad, 2015. "The Relationship between Delegation and Incentives Across Occupations: Evidence and Theory," Journal of Industrial Economics, Wiley Blackwell, vol. 63(2), pages 279-312, June.
    7. Bester, Helmut & Krähmer, Daniel, 2013. "Exit options and the allocation of authority," Discussion Papers 2013/5, Free University Berlin, School of Business & Economics.
    8. Miriam Schütte & Philipp Christoph Wichardt, 2013. "Delegation and Interim Performance Evaluation," CESifo Working Paper Series 4193, CESifo Group Munich.
    9. Søgaard, Rikke & Kristensen, Søren Rud & Bech, Mickael, 2015. "Incentivising effort in governance of public hospitals: Development of a delegation-based alternative to activity-based remuneration," Health Policy, Elsevier, vol. 119(8), pages 1076-1085.
    10. Kräkel, Matthias, 2013. "Authority and Incentives in Organizations," IZA Discussion Papers 7271, Institute for the Study of Labor (IZA).
    11. Schöttner, Anja & Rohlfing-Bastian, Anna, 2015. "Optimal Allocation of Decision-Making Authority and the Provision of Incentives under Uncertainty," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113200, Verein für Socialpolitik / German Economic Association.
    12. Kräkel, Matthias, 2013. "Authority and Incentives in Organizations," IZA Discussion Papers 7271, Institute for the Study of Labor (IZA).
    13. repec:eee:jeborg:v:137:y:2017:i:c:p:54-71 is not listed on IDEAS
    14. Jakub Kastl & David Martimort & Salvatore Piccolo, 2008. "Delegation and R&D Spending: Evidence from Italy," CSEF Working Papers 192, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 17 Oct 2009.
    15. Christos Bilanakos & John S. Heywood & John Sessions & Nikolaos Theodoropoulos, 2016. "Delegation and worker training," University of Cyprus Working Papers in Economics 06-2016, University of Cyprus Department of Economics.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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