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Delegation of Authority as an Optimal (In)complete Contract

  • Andreas Roider

The present paper aims to contribute to the literature on the foundations of incomplete contracts by providing conditions under which simple delegation of authority is the solution to the complete-contracting problem of the parties. We consider a hold-up framework where both parties profit from an investment that raises the value of an asset. Delegation turns out to be optimal if (i) the decision-dependent parts of the payoffs of the parties are linear in the asset value, and (ii) decisions have no investment-independent effect. If overinvestment might be an issue, delegation, however, with restricted competencies is optimal if some additional continuity requirements are met.

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Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse8_2003.

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Length: 21
Date of creation: May 2003
Date of revision: Aug 2004
Handle: RePEc:bon:bonedp:bgse8_2003
Contact details of provider: Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
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  1. Dilip Mookherjee & Stefan Reichelstein, 1996. "Budgeting and Hierarchical Control," Papers 0071, Boston University - Industry Studies Programme.
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  11. Maskin, Eric & Moore, John, 1999. "Implementation and Renegotiation," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 39-56, January.
  12. Oliver Hart & John Moore, 2005. "On the Design of Hierarchies: Coordination versus Specialization," ESE Discussion Papers 117, Edinburgh School of Economics, University of Edinburgh.
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  14. Urs Schweizer, 2000. "An Elementary Approach to the Hold-Up Problem with Renegotiation," Bonn Econ Discussion Papers bgse15_2000, University of Bonn, Germany.
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  22. repec:att:wimass:9714 is not listed on IDEAS
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  24. Edlin, Aaron S & Hermalin, Benjamin E, 2000. "Contract Renegotiation and Options in Agency Problems," Journal of Law, Economics and Organization, Oxford University Press, vol. 16(2), pages 395-423, October.
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