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Exit options and the allocation of authority

  • Bester, Helmut
  • Krähmer, Daniel

We analyze the optimal allocation of authority in an organization whose members have conflicting preferences. One party has decision-relevant private information, and the party who obtains authority decides in a self-interested way. As a novel element in the literature on decision rights, we consider exit option contracts: the party without decision rights is entitled to prematurely terminate the relation after the other party's choice. We show that under such a contract it is always optimal to assign authority to the informed and not to the uninformed party, irrespective of the parties' conflict of interest. Indeed, the first-best efficient solution can be obtained by such a contract.

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Paper provided by Free University Berlin, School of Business & Economics in its series Discussion Papers with number 2013/5.

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Date of creation: 2013
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Handle: RePEc:zbw:fubsbe:20135
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