Externalities and the Allocation of Decision Rights in the Theory of the Firm

Helmut Bester

No 3276, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This Paper views authority as the right to undertake decisions that have external effects on other members of the organization. Because of contractual incompleteness, monetary incentives are insufficient to internalize these effects in the decision-maker?s objective. The optimal assignment of decision rights minimizes the resulting inefficiencies. We illustrate this in a principal?agent model where the principal retains the authority to select ?large? projects but delegates the decision right to the agent to implement ?small? projects. Extensions of the model discuss the role of effort incentives, asymmetric information and multi-stage decisions.

Keywords: Authority; Control rights; Decision rights; Delegation; Externalities; Incomplete contracts; Theory of the firm (search for similar items in EconPapers)
JEL-codes: D23 D82 L22 (search for similar items in EconPapers)
Date: 2002-03
New Economics Papers: this item is included in nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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