Domain knowledge, ability, and the principal's authority relations

Nadav Levy

RAND Journal of Economics, 2014, vol. 45, issue 2, 370-394

Abstract: type="main">

I consider how different managerial traits affect the authority relation between a principal and his agent. An increase in the principal's domain knowledge—which enhances his capability to verify the agent's recommendations—leads to an increase in the proportion of the agent's recommendations that are approved, an increase in the agent's initiative, and is unambiguously beneficial to the principal and to the agent. In contrast, an increase in the principal's general ability to explore additional alternatives on his own leads to the principal making a larger proportion of the decisions. This discourages the agent's initiative and can adversely affect the principal.

Date: 2014
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