Working Paper: CEPR ID: DP9929
Authors: Dongsoo Shin; Roland Strausz
Abstract: Using an agency model, we show how delegation, by generating additional private information, improves dynamic incentives under limited commitment. It circumvents ratchet effects and facilitates the revelation of persistent private information through two effects: a play-hardball effect, which mitigates an efficient agent's ratchet incentive, and a carrot effect which reduces an inefficient agent's take-the-money-and-run incentive. Although delegation entails a loss of control, it is optimal when uncertainty about operational efficiency is large. Moreover, delegation is more effective with production complementarity. We also consider different modes of commitment to yield insights into optimal organizational boundaries.
Keywords: agency; delegation; dynamic incentives; limited commitment
JEL Codes: D82; D86; L22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| delegation (M54) | dynamic incentives (O31) |
| delegation (M54) | revelation of persistent private information (D82) |
| playhardball effect (Z22) | earlier revelation by efficient agent (G14) |
| carrot effect (C92) | discouragement of misrepresentation by inefficient agent (L85) |
| high uncertainty about operational efficiency (D89) | delegation is optimal (H21) |
| delegation (M54) | organizational efficiency (L21) |