On the delegation of authority

Matthias Kräkel

Journal of Economic Behavior & Organization, 2021, vol. 191, issue C, 965-981

Abstract: Authorizing an agent by letting him choose the project he has to carry out will be problematic if the agent receives exogenously given private benefits from specific projects. This paper shows that delegating authority is problematic even without such private benefits. By picking an overly difficult project that does not maximize profits, the agent can force the principal into renegotiation of his incentive contract. This manipulation of incentive pay might deter the principal from efficient delegation. As a policy implication, if the cost of overruling the agent is too high, the principal should rely on a consequent kind of delegation that avoids interim monitoring of the agent and solely assesses realized output.

Keywords: Principal-agent model; Limited liability; Hidden action; Renegotiation (search for similar items in EconPapers)
JEL-codes: D82 D86 L2 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:191:y:2021:i:c:p:965-981

DOI: 10.1016/j.jebo.2021.09.033

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