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Hierarchic contracting

Author

Listed:
  • Rafael Hortala-Vallve
  • Miguel Sanchez

Abstract

We analyze the contracting structure in a moral hazard setting with several agents whereoutput is produced jointly and is the only contractible variable. Since the salary of each agentis a function of all agents efforts, a positive externality arises between them. This externalityis not internalised by a centralised structure where the principal contracts directly with eachagent. Instead, we find that a hierarchic structure (i.e. the delegation of "contracting rights"from the principal to the agents) internalises the externality by making agents "residualclaimants". Consequently, the second best situation can be improved upon just by changingthe contracting structure of the principal-agents relationship. The analysis is relevant to theliterature on decentralisation, outsourcing, subcontracting and intra-firm organization.

Suggested Citation

  • Rafael Hortala-Vallve & Miguel Sanchez, 2005. "Hierarchic contracting," STICERD - Distributional Analysis Research Programme Papers 73, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    • Handle: RePEc:cep:stidar:73
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    References listed on IDEAS

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    More about this item

    Keywords

    Principal-multi-agent relationships; moral hazard; team production; decentralisation; hierarchies; contract design;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

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