Authority and Incentives in Organizations

Matthias Kräkel

No 7271, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: The paper analyzes how the choice of organizational structure leads to the best compromise between controlling behavior based on authority rights and minimizing costs for implementing high efforts. Concentrated delegation and hierarchical delegation turn out to be never an optimal compromise. If the CEO is more efficient than the division heads (i.e., the CEO's costs from exerting high effort are smaller than those of the division heads), the owner will prefer full delegation to the divisions to replace high incentive pay to the division heads by incentives based on private benefits of control. In that situation, decentralization is the optimal form of full delegation given that selfish behavior is more important than cooperation, but cross-authority delegation is optimal for cooperation being crucial. If, however, the division heads are clearly more efficient than the CEO, the owner will choose centralization given that cooperation is the dominating issue, but partial delegation if selfish behavior is crucial.

Keywords: decentralization; contracts; centralization; authority; moral hazard (search for similar items in EconPapers)
JEL-codes: D21 D23 D86 L22 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2013-03
New Economics Papers: this item is included in nep-cta and nep-hrm
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Related works:
Journal Article: Authority and Incentives in Organizations (2017)
Working Paper: Authority and Incentives in Organizations (2013)
Working Paper: Authority and Incentives in Organizations (2013)
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