DP3907 Delegated Job Design

Author(s): Hans K Hvide, Todd Kaplan
Publication Date: April 2003
Keyword(s): career concerns, delegation, discretion, peter principle, sun hydraulics
JEL(s): C72, D23, D44, D82, J33, M12
Programme Areas: Labour Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=3907

Why do firms delegate job design decisions to workers, and what are the implications of such delegation? We develop a private-information based theory of delegation, where delegation enables high-ability workers to signal their ability by choosing difficult tasks. Such signalling provides a more efficient allocation of talent inside the firm, but at the cost that low-ability workers must be compensated to be willing to self-sort. Career concerns put a limit to the efficiency of delegation: when market observability of job content is high, the compensation needed to get low ability workers to self-sort is high, and firms limit delegation to avoid cream-skimming of the high-ability workers. We investigate implications of the theory for how misallocation of talent within firms may occur and to the design optimal incentive contracts.