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Hierarchic contracting

Author

Listed:
  • Sanchez, Miguel A.
  • Hortala-Vallve, Rafael

Abstract

We analyze the contracting structure in a moral hazard setting with several agents where output is produced jointly and is the only contractible variable. Since the salary of each agent is a function of all agents efforts, a positive externality arises between them. This externality is not internalised by a centralised structure where the principal contracts directly with each agent. 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 "residual claimants". Consequently, the second best situation can be improved upon just by changing the contracting structure of the principal-agents relationship. The analysis is relevant to the literature on decentralisation, outsourcing, subcontracting and intra-firm organization.

Suggested Citation

  • Sanchez, Miguel A. & Hortala-Vallve, Rafael, 2005. "Hierarchic contracting," LSE Research Online Documents on Economics 6548, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:6548
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    References listed on IDEAS

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

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