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Contract Complexity, Incentives and the Value of Delegation

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Listed:
  • Nahum Melamad
  • Dilip Mookherjee
  • Stefan Reichelstein

Abstract

In settings where the revelation principle applies, delegation arrangements are frequently inferior to centralized decision making, and at best achieve the same level of performance. This paper studies the value of delegation when organizations are constrained by a bound on the number of contingencies in any contract. For a principal‐agent setting with asymmetric information, we compare centralized mechanisms where the principal retains sole responsibility for contracting and coordinating production, with delegation mechanisms where one agent (a manager) is delegated authority to contract with other agents and coordinate production. Relative to centralization, delegation entails a control loss, but allows decisions to be more sensitive to the manager's private information. We identify circumstances under which the flexibility gain outweighs the control loss, so that delegation emerges superior to centralized contracting.
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Suggested Citation

  • Nahum Melamad & Dilip Mookherjee & Stefan Reichelstein, 1996. "Contract Complexity, Incentives and the Value of Delegation," Papers 0070, Boston University - Industry Studies Programme.
    • Handle: RePEc:fth:bostin:0070
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    References listed on IDEAS

    as
    1. Yingyi Qian, 1994. "Incentives and Loss of Control in an Optimal Hierarchy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(3), pages 527-544.
    2. Patrick Bolton & Mathias Dewatripont, 1994. "The Firm as a Communication Network," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(4), pages 809-839.
    3. Che, Y.K. & Hausch, D.B., 1996. "Cooperative Investments and the Value of Contracting: Coase vs Williamson," Working papers 9608, Wisconsin Madison - Social Systems.
    4. Myerson, Roger B., 1982. "Optimal coordination mechanisms in generalized principal-agent problems," Journal of Mathematical Economics, Elsevier, vol. 10(1), pages 67-81, June.
    5. Kanodia, C, 1993. "Participative Budgets As Coordination And Motivational Devices," Journal of Accounting Research, Wiley Blackwell, vol. 31(2), pages 172-189.
    6. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, December.
    7. Maskin, Eric & Tirole, Jean, 1990. "The Principal-Agent Relationship with an Informed Principal: The Case of Private Values," Econometrica, Econometric Society, vol. 58(2), pages 379-409, March.
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    More about this item

    JEL classification:

    • K10 - Law and Economics - - Basic Areas of Law - - - General (Constitutional Law)
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General

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