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Information Gathering, Delegated Contracting And Corporate Hierarchies

  • Chongwoo Choe
  • In-Uck Park

In a typical corporate hierarchy, the manager is delegated the authority to make strategic decisions, and to contract with other employees. We study when such delegation can be optimal. In centralization, the owner retains the authority, which fails to motivate the manager to acquire valuable information, leading to suboptimal decisions and inefficient incentive provision to the worker. Beneficial delegation should necessarily motivate the manager to acquire information, which is possible only when the authority is delegated to the manager. We also document comparative statics results regarding the benefits of delegation and discuss when delegation is more likely to dominate centralization.

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File URL: http://www.buseco.monash.edu.au/eco/research/papers/2008/1908informationchoepark.pdf
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Paper provided by Monash University, Department of Economics in its series Monash Economics Working Papers with number 19/08.

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Length: 35 pages
Date of creation: 02 Jul 2008
Date of revision:
Handle: RePEc:mos:moswps:2008-19
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