Risk, Delegation, and Project Scope

Andreas Roider

No 3117, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper studies a partial-contracting model where an agent may provide effort to increase a project’s scope before some later decisions have to be taken. Consistent with existing empirical evidence, we find a positive relationship between exogenous risk and delegation. That is, we show that only if exogenous risk is sufficiently large, the risk-neutral principal may prefer to delegate authority over decisions to the risk-averse agent. Intuitively, for incentive reasons, the principal may optimally want to allow the agent to reduce his risk exposure. Nevertheless, even endogenous risk may be higher when the risk-averse agent has control.

Keywords: authority; delegation; partial contracting; risk (search for similar items in EconPapers)
JEL-codes: D21 D23 D86 G34 L14 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2007-10
New Economics Papers: this item is included in nep-bec and nep-ppm
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Published - revised version published as 'Delegation, Risk, and Project Scope ' in: Journal of Institutional and Theoretical Economics, 2009, 165 (2), 193-209

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