Working Paper: CEPR ID: DP3276
Authors: Helmut Bester
Abstract: This Paper views authority as the right to undertake decisions that have external effects on other members of the organization. Because of contractual incompleteness, monetary incentives are insufficient to internalize these effects in the decision-maker?s objective. The optimal assignment of decision rights minimizes the resulting inefficiencies. We illustrate this in a principal?agent model where the principal retains the authority to select ?large? projects but delegates the decision right to the agent to implement ?small? projects. Extensions of the model discuss the role of effort incentives, asymmetric information and multi-stage decisions.
Keywords: authority; control rights; decision rights; delegation; externalities; incomplete contracts; theory of the firm
JEL Codes: D23; D82; L22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| allocation of decision rights (D70) | organizational efficiency (L21) |
| principal retains authority over project selection (G11) | misalignment of incentives (D82) |
| delegation of decision rights to the agent (D70) | alignment of interests (L21) |
| delegation of decision rights to the agent (D70) | overall efficiency (D61) |
| agent internalizes costs better than the principal (D23) | better outcomes (I14) |