Citation

Discussion Paper Details

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Title: Externalities and the Allocation of Decision Rights in the Theory of the Firm

Author(s): Helmut Bester

Publication Date: March 2002

Keyword(s): authority, control rights, decision rights, delegation, externalities, incomplete contracts and theory of the firm

Programme Area(s): Industrial Organization

Abstract: This Paper views authority as the right to undertake decisions that have external effects on other members of the organization. Because of contractual incompleteness, monetary incentives are insufficient to internalize these effects in the decision-maker?s objective. The optimal assignment of decision rights minimizes the resulting inefficiencies. We illustrate this in a principal?agent model where the principal retains the authority to select ?large? projects but delegates the decision right to the agent to implement ?small? projects. Extensions of the model discuss the role of effort incentives, asymmetric information and multi-stage decisions.

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Bibliographic Reference

Bester, H. 2002. 'Externalities and the Allocation of Decision Rights in the Theory of the Firm'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=3276