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Delegation Versus Centralization: The Role of Externalities

Author

Listed:
  • Sergio Currarini

    () (Department of Economics, University Of Venice Ca� Foscari)

  • Francesco Feri

    (Department of Economics, University Of Venice Ca� Foscari)

Abstract

We study a simple contracting game with a principal and two agents. Contracts exert an externalities on non contractors. The principal can either contract both agents in a centralized manner, or delegate one agent to contract the other. We show that the choice of the principal depends on the sign of the externality. If this is positive, the principal prefers to delegate as long as the agency costs are not too high; if the externality is negative, the principal prefers to centralize for all sizes of agency costs.

Suggested Citation

  • Sergio Currarini & Francesco Feri, 2006. "Delegation Versus Centralization: The Role of Externalities," Working Papers 2006_15, Department of Economics, University of Venice "Ca' Foscari".
  • Handle: RePEc:ven:wpaper:2006_15
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    References listed on IDEAS

    as
    1. Genicot, Garance & Ray, Debraj, 2006. "Contracts and externalities: How things fall apart," Journal of Economic Theory, Elsevier, vol. 131(1), pages 71-100, November.
    2. Dilip Mookherjee & Masatoshi Tsumagari, 2004. "The Organization of Supplier Networks: Effects of Delegation and Intermediation," Econometrica, Econometric Society, vol. 72(4), pages 1179-1219, July.
    3. Ilya Segal, 1999. "Contracting with Externalities," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 337-388.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Contracts; Externalities; Centralization; Delegation.;

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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