IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this article

Incentives and Coordination in Hierarchies

Listed author(s):
  • Mookherjee Dilip


    (Boston University)

  • Reichelstein Stefan


    (UC Berkeley)

The internal organization of large firms as well as procurement and regulation contexts frequently involve a hierarchical nexus of contracts, with substantial delegation of decision making across layers. Such hierarchical delegation of decision making creates problems of aligning incentives of vertically related agents, and coordinating the actions of different branches of the hierarchy. In a principal-agent setting with private information, it is shown that under certain assumptions (top-down contracting, observability of subcontracting outcomes, absence of limited liability constraints) the hierarchy can implement second-best allocations. Incentive problems are overcome via compensations that are linear in a measure of performance of the concerned department, defined as the difference between a measure of imputed revenues and procurement costs. The coordination problem is overcome by conditioning output targets and payments on cost reports submitted by other branches; despite this, agents' strategies are dominant with respect to the behavior of members of other branches. The result provides conditions for the lack of a `control loss' from hierarchical decentralization of decision making, owing to incentive or coordination problems.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: For access to full text, subscription to the journal or payment for the individual article is required.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by De Gruyter in its journal The B.E. Journal of Theoretical Economics.

Volume (Year): 1 (2001)
Issue (Month): 1 (April)
Pages: 1-38

in new window

Handle: RePEc:bpj:bejtec:v:advances.1:y:2001:i:1:n:4
Contact details of provider: Web page:

Order Information: Web:

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:bpj:bejtec:v:advances.1:y:2001:i:1:n:4. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peter Golla)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.