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Externalities and the Allocation of Decision Rights in the Theory of the Firm

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  • Bester, Helmut

Abstract

This Paper views authority as the right to undertake decisions that have external effects on other members of the organization. Because of contractual incompleteness, monetary incentives are insufficient to internalize these effects in the decision-maker?s objective. The optimal assignment of decision rights minimizes the resulting inefficiencies. We illustrate this in a principal?agent model where the principal retains the authority to select ?large? projects but delegates the decision right to the agent to implement ?small? projects. Extensions of the model discuss the role of effort incentives, asymmetric information and multi-stage decisions.

Suggested Citation

  • Bester, Helmut, 2002. "Externalities and the Allocation of Decision Rights in the Theory of the Firm," CEPR Discussion Papers 3276, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:3276
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    References listed on IDEAS

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    1. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 2002. "On partial contracting," European Economic Review, Elsevier, vol. 46(4-5), pages 745-753, May.
    2. repec:ner:ucllon:http://discovery.ucl.ac.uk/17678/ is not listed on IDEAS
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    7. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 1-29, February.
    8. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
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    10. Ilya Segal, 1999. "Complexity and Renegotiation: A Foundation for Incomplete Contracts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(1), pages 57-82.
    11. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
    12. Eric Maskin & Jean Tirole, 1999. "Unforeseen Contingencies and Incomplete Contracts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(1), pages 83-114.
    13. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
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    Citations

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    Cited by:

    1. 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.
    2. Krahmer, Daniel, 2006. "Message-contingent delegation," Journal of Economic Behavior & Organization, Elsevier, vol. 60(4), pages 490-506, August.
    3. Krähmer, Daniel, 2002. "Delegation versus authority [Delegation versus Autorität]," Discussion Papers, Research Unit: Market Processes and Governance FS IV 02-26, WZB Berlin Social Science Center.
    4. Stefan Ambec, 2003. "A Theory of Authority in Bilateral Contracting," CSEF Working Papers 102, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    5. Kieron Meagher & Andrew Wait, 2008. "Who Decides about Change and Restructuring in Organizations?," CEPR Discussion Papers 587, Centre for Economic Policy Research, Research School of Economics, Australian National University.

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    More about this item

    Keywords

    Authority; Control rights; Decision rights; Delegation; Externalities; Incomplete contracts; Theory of the firm;
    All these keywords.

    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

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