Technical Change, Moral Hazard, and the Decentralization Penalty

Thomas Marschak and Dong Wei

Journal of Institutional and Theoretical Economics (JITE), 2024, vol. 180, issue 4, 681-708

Abstract: We compare two modes of organizing a firm with regard to social welfare. In the centralized mode, worker-control techniques, together with adequate compensation, ensure that the worker chooses a surplus-maximizing effort. In the decentralized mode, a profit-driven principal contracts with a self-interested agent who freely chooses an effort and bears its cost. The resulting loss of surplus is called the decentralization penalty. For certain common contract types, we study how the penalty responds to changes in production technology. As production technology improves, the penalty oscillates in a continuous-rise-sudden-drop cycle. While advances in worker-control technology always strengthen the socialwelfare case for centralization, advances in production technology may do the opposite.

Keywords: decentralization; social welfare; technical change; moral hazard (search for similar items in EconPapers)
JEL-codes: D21 D86 M52 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.mohrsiebeck.com/en/article/technical-c ... 101628jite-2024-0029
Fulltext access is included for subscribers to the printed version.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mhr:jinste:urn:doi:10.1628/jite-2024-0029

Ordering information: This journal article can be ordered from
Mohr Siebeck GmbH & Co. KG, P.O.Box 2040, 72010 Tübingen, Germany

DOI: 10.1628/jite-2024-0029

Access Statistics for this article

Journal of Institutional and Theoretical Economics (JITE) is currently edited by Gerd Mühlheußer and Bayer, Ralph-C

More articles in Journal of Institutional and Theoretical Economics (JITE) from Mohr Siebeck, Tübingen
Bibliographic data for series maintained by Thomas Wolpert ().