Delegation of Authority as an Optimal (In)complete Contract

Andreas Roider

No 1298, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: The present paper aims to contribute to the literature on the foundations of incomplete contracts by providing conditions under which simple delegation of authority is the solution to the complete-contracting problem of the parties. We consider a hold-up framework where both parties profit from an investment that raises the value of an asset. Delegation turns out to be optimal if (i) the decision-dependent parts of the payoffs of the parties are linear in the asset value, and (ii) decisions have no investment-independent effect. If overinvestment might be an issue, delegation, however, with restricted competencies is optimal if some additional continuity requirements are met.

Keywords: hold-up; delegation; decentralization; authority; property rights; incomplete contracts (search for similar items in EconPapers)
JEL-codes: D23 D82 L14 L22 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2004-09
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Published - revised version published in: Journal of Institutional and Theoretical Economics, 2006, 162(3), 391-411

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Related works:
Journal Article: Delegation of Authority as an Optimal (In)Complete Contract (2006)
Working Paper: Delegation of Authority as an Optimal (In)complete Contract (2003)
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