Working Paper: CEPR ID: DP3907
Authors: Hans K. Hvide; Todd Kaplan
Abstract: Why do firms delegate job design decisions to workers, and what are the implications of such delegation? We develop a private-information based theory of delegation, where delegation enables high-ability workers to signal their ability by choosing difficult tasks. Such signalling provides a more efficient allocation of talent inside the firm, but at the cost that low-ability workers must be compensated to be willing to self-sort. Career concerns put a limit to the efficiency of delegation: when market observability of job content is high, the compensation needed to get low ability workers to self-sort is high, and firms limit delegation to avoid cream-skimming of the high-ability workers. We investigate implications of the theory for how misallocation of talent within firms may occur and to the design optimal incentive contracts.
Keywords: career concerns; delegation; discretion; Peter Principle; Sun Hydraulics
JEL Codes: C72; D23; D44; D82; J33; M12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| delegation (M54) | efficiency in talent allocation (D29) |
| high observability (D80) | compensation demands from low-ability workers (J31) |
| high observability (D80) | limit on delegation (D72) |
| delegation (M54) | misallocation of talent (D29) |
| high-ability workers (J24) | higher wages than low-ability workers (J31) |
| rationing equilibria (D45) | low-ability workers assigned to difficult tasks (J29) |
| increased delegation (H77) | lower levels of misallocation (D61) |