Delegated Contracting and Corporate Hierarchies

In-Uck Park and Chongwoo Choe

No 14, Econometric Society 2004 Latin American Meetings from Econometric Society

Abstract: In a typical corporate hierarchy, the manager is delegated the authority to make decisions that set directions for the organization, employ subordinates and contract with external suppliers. This paper explains when such delegation of authority can be optimal, using a model of a firm with three parties: the principal, the manager and the worker. In centralization with two two-tier hierarchies, the principal designs contracts for both agents. In delegation with a three-tier hierarchy, the principal directly contracts with a delegated agent who, in turn, contracts with the other agent. We identify an environment where the principal can benefit from delegating authority to the manager, but not to the worker. Beneficial delegation arises endogenously when delegation motivates the manager to acquire valuable information, which is used for better decision-making and more effcient incentive provision to the worker. We also show how total surplus is distributed in delegation vis-a-vis centralization, document comparative statics results regarding the benefits of delegation and the distribution of total surplus, and discuss when delegation is more likely to dominate centralization

Keywords: Corporate hierarchies; centralization; delegation; optimal contract. (search for similar items in EconPapers)
JEL-codes: C72 D21 D82 (search for similar items in EconPapers)
Date: 2004-08-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://repec.org/esLATM04/up.2236.1079262381.pdf (application/pdf)

Related works:
Working Paper: Delegated Contracting and Corporate Hierarchies (2003)
Working Paper: Delegated Contracting and Corporate Hierarchies (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:ecm:latm04:14

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