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Delegation of Authority as an Optimal (In)complete Contract

  • Roider, Andreas

    ()

    (University of Regensburg)

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 Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1298.

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Length: 24 pages
Date of creation: Sep 2004
Handle: RePEc:iza:izadps:dp1298
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