Working Paper: CEPR ID: DP8302
Authors: Leonardo Felli; Rafael Hortalavallve
Abstract: Large public bureaucracies are commonly regarded as less efficient than modern private corporations. This paper explores how the degree of discretionary power might account for this difference in efficiency. Indeed, increasing the discretionary power of the intermediate layers of an organization - delegating power to them - enhances productivity by preventing collusion and capture between middle managers and line workers; provided that this detrimental form of collusion takes place in conditions of asymmetric information.To understand how this mechanism works requires an explicit model of the penalty for breach of a collusive agreement a party has to incur to walk away from such a side deal. Delegation is then a simple way for the principal to compensate the uninformed colluding party for walking out of collusion and for using/reporting the information leaked in the collusive negotiation. This threat clearly reduces the informed party incentive to participate in side deals and prevents collusion at a reduced cost.
Keywords: collusion; communication; delegation; hierarchies
JEL Codes: D73; D78; D83
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increasing the discretionary power of middle managers (M54) | enhances productivity (O49) |
| increasing the discretionary power of middle managers (M54) | prevents collusion between managers and line workers (M54) |
| increasing the discretionary power of middle managers (M54) | reduces communication opportunities for collusion (D70) |
| reducing communication opportunities for collusion (D70) | enhances overall productivity (O49) |
| bureaucratic structures (D73) | facilitate harmful collusion (L12) |
| supervisors possessing discretionary power (J53) | exploit leaked information from collusive agreements (L12) |
| supervisors possessing discretionary power (J53) | prevents collusion effectively (L12) |
| discretionary power (E60) | prevents collusion at zero cost (K21) |