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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- Schmitz, Patrick W, 2005. "Allocating Control in Agency Problems with Limited Liability and Sequential Hidden Actions," CEPR Discussion Papers 5145, C.E.P.R. Discussion Papers.
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