Delegation, Risk, and Project Scope
This paper studies a partial-contracting model where an agent may provide effort to increase a project´s scope before some later (operative) decisions have to be taken. Consistent with existing empirical evidence, we find a positive relationship between exogenous risk and delegation. That is, only if the exogenous risk is sufficiently large may the risk-neutral principal prefer to delegate authority over decisions to the risk-averse agent. Intuitively, for incentive reasons, the principal may optimally want to allow the agent to reduce his risk exposure. Nevertheless, even endogenous risk may be higher when the risk-averse agent has control.
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Volume (Year): 165 (2009)
Issue (Month): 2 (June)
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References listed on IDEAS
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- 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.
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"Can the theory of incentives explain decentralization?,"
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- Michel Poitevin, 2000. "Can the Theory of Incentives Explain Decentralization?," CIRANO Working Papers 2000s-32, CIRANO.
- Poitevin, M., 2000. "Can the Theory of Incentives Explain Devcentralization?," Cahiers de recherche 2000-13, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
- Guo, Ming & Ou-Yang, Hui, 2006. "Incentives and performance in the presence of wealth effects and endogenous risk," Journal of Economic Theory, Elsevier, vol. 129(1), pages 150-191, July.
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