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Externalities, communication and the allocation of decision rights

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  • Helmut Bester

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Abstract

This paper views authority as the right to undertake decisions that impose externalities on other members of the organization. When only decision rights can be contractually assigned to one of the organization's stakeholders, the optimal assignment minimizes the resulting inefficiencies by giving control rights to the party with the highest stake in the organization's decisions. Under asymmetric information, the efficient allocation of authority depends on the communication of private information. In the case of multiple decision areas, divided control rights may enhance organizational efficiency unless there exist complementarities between different decisions.
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Suggested Citation

  • Helmut Bester, 2009. "Externalities, communication and the allocation of decision rights," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 41(2), pages 269-296, November.
  • Handle: RePEc:spr:joecth:v:41:y:2009:i:2:p:269-296 DOI: 10.1007/s00199-008-0395-z
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Luigi Marengo & Corrado Pasquali, 2010. "How to get what you want when you do not know what you want. A model of incentives, organizational structure and learning," LEM Papers Series 2010/08, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    2. Marco Francesconi & Abhinay Muthoo, 2011. "Control Rights In Complex Partnerships," Journal of the European Economic Association, European Economic Association, vol. 9(3), pages 551-589, June.
    3. Kerstin Puschke, "undated". "The Allocation of Authority under Limited Liability," Papers 029, Departmental Working Papers.
    4. Kerstin Puschke, "undated". "Optimal Hierarchies with Diverse Decision-Makers," Papers 034, Departmental Working Papers.
    5. Helmut Bester & Daniel Krähmer, 2008. "Delegation and incentives," RAND Journal of Economics, RAND Corporation, vol. 39(3), pages 664-682.
    6. Bester, Helmut & Krähmer, Daniel, 2013. "Exit options and the allocation of authority," Discussion Papers 2013/5, Free University Berlin, School of Business & Economics.
    7. Alonso, Ricardo, 2009. "Strategic control and strategic communication," LSE Research Online Documents on Economics 58682, London School of Economics and Political Science, LSE Library.
    8. Krähmer, Daniel & Kováč, Eugen, 2016. "Optimal sequential delegation," Journal of Economic Theory, Elsevier, vol. 163(C), pages 849-888.
    9. Francesconi, Marco & Muthoo, Abhinay, 2006. "Control Rights in Public-Private Partnerships," CEPR Discussion Papers 5733, C.E.P.R. Discussion Papers.
    10. Lim, Wooyoung, 2014. "Communication in bargaining over decision rights," Games and Economic Behavior, Elsevier, vol. 85(C), pages 159-179.
    11. Lim, Wooyoung, 2012. "Selling authority," Journal of Economic Behavior & Organization, Elsevier, vol. 84(1), pages 393-415.
    12. Dessein, Wouter, 2012. "Incomplete Contracts and Firm Boundaries: New Directions," CEPR Discussion Papers 9019, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    Authority; Decision rights; Externalities; Incomplete contracts; Imperfect information; Theory of the firm; D23; D82; L22; P14;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • P14 - Economic Systems - - Capitalist Systems - - - Property Rights

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