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The Optimal Allocation of Power in Organisations

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  • E. Carbonara

Abstract

Starting from the separation between formal and real authority, the paper considers a hierarchical relation where delegation of control can be used as an incentive mechanism. It shows that delegation is optimal when parties interests are neither too divergent nor too close. In that case superiors do not need to monitor too closely, curbing the subordinates initiative and subordinates have no incentives to free ride on the superiors information. The analysis is then extended to a multi-period setting. If subordinates acquire expertise on the job (learning by doing), effort has the nature of a specific investment whose intrinsic value is higher the longer the subordinate s working life. Therefore, a policy of gradual delegation is possible, where agents accept weaker incentives at the beginning of their career, requiring stronger incentives over time as the value of their knowledge diminishes.

Suggested Citation

  • E. Carbonara, 1999. "The Optimal Allocation of Power in Organisations," Working Papers 358, Dipartimento Scienze Economiche, Universita' di Bologna.
    • Handle: RePEc:bol:bodewp:358
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    1. Sah, Raaj Kumar & Stiglitz, Joseph E, 1986. "The Architecture of Economic Systems: Hierarchies and Polyarchies," American Economic Review, American Economic Association, vol. 76(4), pages 716-727, September.
    2. Margaret A. Meyer, 1994. "The Dynamics of Learning with Team Production: Implications for Task Assignment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(4), pages 1157-1184.
    3. Mike Burkart & Denis Gromb & Fausto Panunzi, 1997. "Large Shareholders, Monitoring, and the Value of the Firm," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(3), pages 693-728.
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