DP6042 Delegation and Incentives

Author(s): Helmut Bester, Daniel Krähmer
Publication Date: January 2007
Keyword(s): Authority, Delegation, Limited liability, Moral hazard, Principal-agent problem
JEL(s): D82, D86
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=6042

This paper analyses the relation between authority and incentives. It extends the standard principal--agent model by a project selection stage in which the principal can either delegate the choice of project to the agent or keep the authority. The agent's subsequent choice of effort depends both on monetary incentives and the selected project. We find that the consideration of effort incentives makes the principal less likely to delegate the authority over projects to the agent. In fact, if the agent is protected by limited liability, delegation is never optimal.