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On the delegation of authority

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  • Kräkel, Matthias

Abstract

Authorizing an agent by letting him choose the project he has to carry out will be problematic if the agent receives exogenously given private benefits from specific projects. This paper shows that delegating authority is problematic even without such private benefits. By picking an overly difficult project that does not maximize profits, the agent can force the principal into renegotiation of his incentive contract. This manipulation of incentive pay might deter the principal from efficient delegation. As a policy implication, if the cost of overruling the agent is too high, the principal should rely on a consequent kind of delegation that avoids interim monitoring of the agent and solely assesses realized output.

Suggested Citation

  • Kräkel, Matthias, 2021. "On the delegation of authority," Journal of Economic Behavior & Organization, Elsevier, vol. 191(C), pages 965-981.
    • Handle: RePEc:eee:jeborg:v:191:y:2021:i:c:p:965-981
    DOI: 10.1016/j.jebo.2021.09.033
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    Cited by:

    1. Schmitz, Patrick W., 2023. "Incentivizing research with (un)conditional teaching duties: Punishment or rent extraction?," Economics Letters, Elsevier, vol. 224(C).

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    More about this item

    Keywords

    Principal-agent model; Limited liability; Hidden action; Renegotiation;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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