Organizational Design: Authority Delegation and Moral Hazard

Joaquin Coleff and Juan Ivars

No 367, Working Papers from Red Nacional de Investigadores en Economía (RedNIE)

Abstract: We consider an organization with two projects which have productive spillovers. Three individuals are active in this organization: two agents, each specialized in one project, and the CEO, who is a generalist. The owner of the organization allocates authority over each project to these three individuals. This allocation determines the organizational design and aims to maximize profits subject to incentive constraints. The main constraints arise from non-contractible choices: in decision-making, to exploit the gains from spillovers, and in providing incentives to address moral hazard in effort. We show that the optimal organizational design can take one of the following forms: centralization, decentralization, hierarchical delegation, or cross-authority. Two forces drive the optimal organizational design: (i) the CEO’s productivity relative to the agents’ in exerting effort, and (ii) the value of spillovers relative to profits in the project over which an individual has authority. We illustrate the practical relevance of our model by analyzing the emergence of hierarchical delegation in Facebook’s major 2018 reorganization.

Keywords: decision rights; authority; moral hazard; hierarchies; incentives (search for similar items in EconPapers)
JEL-codes: C70 D23 L22 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2025-08
New Economics Papers: this item is included in nep-cta, nep-des, nep-hrm, nep-mic and nep-ppm
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Persistent link: https://EconPapers.repec.org/RePEc:aoz:wpaper:367

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