Price Delegation and Performance Pay: Evidence from Industrial Sales Forces

Desmond (Ho-Fu) Lo, Wouter Dessein, Mrinal Ghosh and Francine Lafontaine ()

The Journal of Law, Economics, and Organization, 2016, vol. 32, issue 3, 508-544

Abstract: Delegation is a central feature of organizational design that theory suggests should be aligned with the intensity of incentives. We explore a specific form of delegation, namely price delegation, whereby firms allow sales people to offer a maximum discount from the list price to their customers. We develop a model of the price delegation decision based on information acquisition that relies on characteristics of our empirical context of industrial sales. Using data on individual sales people, one per firm from a survey of 261 firms, we show that, consistent with predictions from our model, sales people are given more pricing authority when they are more experienced and more capable, when there is less environmental uncertainty, and, to a lesser extent, when customer valuations for the product are more variable. Also consistent with our model, we show that price delegation is increasing in the intensity of incentives given to agents. (JEL D23, D82, L22, M52)

Date: 2016
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