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Delegation and incentives

Author

Listed:
  • Helmut Bester
  • Daniel Krähmer

Abstract

This article analyzes the relation between authority and incentives. It extends the standard principal‐agent model by a project selection stage in which the principal can either delegate the choice of project to the agent or keep the authority. The agent's subsequent choice of effort depends both on monetary incentives and the selected project. We find that the consideration of effort incentives makes the principal less likely to delegate the authority over projects to the agent. In fact, if the agent is protected by limited liability, delegation is never optimal.

Suggested Citation

  • Helmut Bester & Daniel Krähmer, 2008. "Delegation and incentives," RAND Journal of Economics, RAND Corporation, vol. 39(3), pages 664-682, September.
    • Handle: RePEc:bla:randje:v:39:y:2008:i:3:p:664-682
    DOI: 10.1111/j.1756-2171.2008.00033.x
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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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