Delegation Versus Centralization: The Role of Externalities
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.
|Date of creation:||2006|
|Date of revision:|
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- Garance Genicot and Debraj Ray, 2003.
"Contracts and Externalities: How Things Fall Apart,"
gueconwpa~03-03-30, Georgetown University, Department of Economics.
- Genicot, Garance & Ray, Debraj, 2006. "Contracts and externalities: How things fall apart," Journal of Economic Theory, Elsevier, vol. 131(1), pages 71-100, November.
- Garance Genicot & Debraj Ray, 2003. "Contracts and Externalities: How Things Fall Apart," Levine's Working Paper Archive 506439000000000235, David K. Levine.
- Ilya Segal, 1999. "Contracting with Externalities," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 337-388.
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