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Externalities, communication and the allocation of decision rights

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  • Bester, Helmut

Abstract

This paper views authority as the right to undertake decisions that impose externalities on other members of the organization. When only decision rights can be contractually assigned to one of the organization's stakeholders, the optimal assignment minimizes the resulting inefficiencies by giving control rights to the party with the highest stake in the organization's decisions. Under asymmetric information, the efficient allocation of authority depends on the communication of private information. In the case of multiple decision areas, divided control rights may enhance organizational efficiency unless there exist complementarities between different decisions.

Suggested Citation

  • Bester, Helmut, 2005. "Externalities, communication and the allocation of decision rights," Discussion Papers 2005/21, Free University Berlin, School of Business & Economics.
  • Handle: RePEc:zbw:fubsbe:200521
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    Cited by:

    1. Marco Francesconi & Abhinay Muthoo, 2011. "Control Rights In Complex Partnerships," Journal of the European Economic Association, European Economic Association, vol. 9(3), pages 551-589, June.
    2. Kerstin Puschke, "undated". "The Allocation of Authority under Limited Liability," Papers 029, Departmental Working Papers.
    3. Francesconi, Marco & Muthoo, Abhinay, 2006. "Control Rights in Public-Private Partnerships," CEPR Discussion Papers 5733, C.E.P.R. Discussion Papers.
    4. Lim, Wooyoung, 2014. "Communication in bargaining over decision rights," Games and Economic Behavior, Elsevier, vol. 85(C), pages 159-179.
    5. Krähmer, Daniel & Kováč, Eugen, 2016. "Optimal sequential delegation," Journal of Economic Theory, Elsevier, vol. 163(C), pages 849-888.
    6. Leslie A. Robinson & Phillip C. Stocken, 2013. "Location of Decision Rights Within Multinational Firms," Journal of Accounting Research, Wiley Blackwell, vol. 51(5), pages 1261-1297, December.
    7. Helmut Bester & Daniel Krähmer, 2008. "Delegation and incentives," RAND Journal of Economics, RAND Corporation, vol. 39(3), pages 664-682, September.
    8. Bester, Helmut & Krähmer, Daniel, 2013. "Exit options and the allocation of authority," Discussion Papers 2013/5, Free University Berlin, School of Business & Economics.
    9. Kerstin Puschke, "undated". "Optimal Hierarchies with Diverse Decision-Makers," Papers 034, Departmental Working Papers.
    10. Kräkel, Matthias, 2018. "Empowerment and the Dark Side of Delegation," IZA Discussion Papers 11289, Institute of Labor Economics (IZA).
    11. Evan Barlow & Gad Allon & Achal Bassamboo, 2021. "The autonomous flexible labor force," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(2), pages 516-527, March.
    12. Luigi Marengo & Corrado Pasquali, 2010. "How to get what you want when you do not know what you want. A model of incentives, organizational structure and learning," LEM Papers Series 2010/08, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    13. Andrei Hagiu & Julian Wright, 2019. "Controlling vs. Enabling," Management Science, INFORMS, vol. 65(2), pages 577-595, February.
    14. Dessein, Wouter, 2012. "Incomplete Contracts and Firm Boundaries: New Directions," CEPR Discussion Papers 9019, C.E.P.R. Discussion Papers.
    15. Kerstin Puschke, 2007. "The Allocation of Authority in a Joint Project under Limited Liability," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 163(3), pages 394-410, September.
    16. Alonso, Ricardo, 2009. "Strategic control and strategic communication," LSE Research Online Documents on Economics 58682, London School of Economics and Political Science, LSE Library.
    17. Lim, Wooyoung, 2012. "Selling authority," Journal of Economic Behavior & Organization, Elsevier, vol. 84(1), pages 393-415.

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    More about this item

    Keywords

    Authority; Decision Rights; Externalities; Incomplete Contracts; Imperfect Information; Theory of the Firm;
    All these keywords.

    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
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • P14 - Economic Systems - - Capitalist Systems - - - Property Rights

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