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Risk, Delegation, and Project Scope

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  • Roider, Andreas

    (University of Regensburg)

Abstract

This paper studies a partial-contracting model where an agent may provide effort to increase a project’s scope before some later decisions have to be taken. Consistent with existing empirical evidence, we find a positive relationship between exogenous risk and delegation. That is, we show that only if exogenous risk is sufficiently large, the risk-neutral principal may prefer to delegate authority over decisions to the risk-averse agent. Intuitively, for incentive reasons, the principal may optimally want to allow the agent to reduce his risk exposure. Nevertheless, even endogenous risk may be higher when the risk-averse agent has control.

Suggested Citation

  • Roider, Andreas, 2007. "Risk, Delegation, and Project Scope," IZA Discussion Papers 3117, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp3117
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    References listed on IDEAS

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    More about this item

    Keywords

    authority; delegation; partial contracting; risk;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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