Working Paper: CEPR ID: DP6042
Authors: Helmut Bester; Daniel Krhmer
Abstract: This paper analyses the relation between authority and incentives. It extends the standard principal--agent model by a project selection stage in which the principal can either delegate the choice of project to the agent or keep the authority. The agent's subsequent choice of effort depends both on monetary incentives and the selected project. We find that the consideration of effort incentives makes the principal less likely to delegate the authority over projects to the agent. In fact, if the agent is protected by limited liability, delegation is never optimal.
Keywords: authority; delegation; limited liability; moral hazard; principal-agent problem
JEL Codes: D82; D86
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Delegation of authority (M54) | Diminished when effort incentives are considered (D29) |
| Effort incentives (J33) | Principal less likely to delegate authority (D73) |
| Limited liability (K13) | Delegation is never optimal (D72) |
| Principal anticipates agent's effort positively correlates with private benefits (D29) | Higher joint benefits when principal retains authority (M54) |
| No limited liability (G39) | Delegation may occur if agent's ideal project generates more surplus than principal's (D69) |
| Decreasing effort costs (D24) | Principal more inclined to keep authority (P14) |
| Limited liability (K13) | Principal's interests align with retaining authority (D73) |
| Retaining authority (G18) | Ensures at least the same payoff as delegation (D72) |
| Limited liability (K13) | Delegation is inferior (D73) |