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The Allocation of Authority under Limited Liability

  • Kerstin Puschke

    ()

    (Free University of Berlin, Department of Economics)

Authority is modelled as the right to undertake a non-contractible decision in a joint project. We show that the allocation of authority depends on bargaining power and differences in both parties cost functions. The decision-maker is assumed to exert an externality on the other parties. Overall surplus is shared according to generalized Nash bargaining. Under limited liability, the agent with the larger cost parameter receives authority if the agents' cost parameters are very different. If the agents have similar cost parameters, bargaining power determines the allocation of authority. Possible applications include the introduction of a new product.

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Paper provided by Departmental Working Papers in its series Papers with number 029.

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Handle: RePEc:bef:lsbest:029
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  1. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Scholarly Articles 4554125, Harvard University Department of Economics.
  2. Raghuram G. Rajan & Luigi Zingales, 1998. "Power In A Theory Of The Firm," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 387-432, May.
  3. Hart, Oliver D. & Moore, John, 1990. "Property Rights and the Nature of the Firm," Scholarly Articles 3448675, Harvard University Department of Economics.
  4. Grossman, Sanford J & Hart, Oliver, 1985. "The Cost and Benefits of Ownership: A Theory of Vertical and Lateral Integration," CEPR Discussion Papers 70, C.E.P.R. Discussion Papers.
  5. Dessein, Wouter, 2002. "Authority and Communication in Organizations," Review of Economic Studies, Wiley Blackwell, vol. 69(4), pages 811-38, October.
  6. Bester, Helmut, 2005. "Externalities, communication and the allocation of decision rights," Discussion Papers 2005/21, Free University Berlin, School of Business & Economics.
  7. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
  8. Baker, George & Gibbons, Robert & Murphy, Kevin J, 1999. "Informal Authority in Organizations," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(1), pages 56-73, April.
  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. Aghion, Philippe & Bolton, Patrick, 1992. "An Incomplete Contracts Approach to Financial Contracting," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 473-94, July.
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