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A Theory of Authority in Bilateral Contracting

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Abstract

Two players are involved in a joint project during which a decision must be reached. Each player has private information about future profits. Authority gives one player the right to decide first in a pre-defined set of alternatives. In this framework, I show that (partial) authority should be assigned to the player who gets the highest share of the total surplus. This organizational architecture replicates the performance of an optimal revelation mechanism without the cost of hiring a third party acting as a principal.

Suggested Citation

  • 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.
  • Handle: RePEc:sef:csefwp:102
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    1. Michel Poitevin, 2000. "Can the theory of incentives explain decentralization?," Canadian Journal of Economics, Canadian Economics Association, vol. 33(4), pages 878-906, November.
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    More about this item

    Keywords

    Contract; asymmetric information; control rights; limited liability; hidden information;

    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
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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