Discussion Paper Details

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Title: Delegation and Dynamic Incentives

Author(s): Dongsoo Shin and Roland Strausz

Publication Date: April 2014

Keyword(s): Agency, Delegation, Dynamic Incentives and Limited Commitment

Programme Area(s): Industrial Organization

Abstract: Using an agency model, we show how delegation, by generating additional private information, improves dynamic incentives under limited commitment. It circumvents ratchet effects and facilitates the revelation of persistent private information through two effects: a play-hardball effect, which mitigates an efficient agent's ratchet incentive, and a carrot effect which reduces an inefficient agent's take-the-money-and-run incentive. Although delegation entails a loss of control, it is optimal when uncertainty about operational efficiency is large. Moreover, delegation is more effective with production complementarity. We also consider different modes of commitment to yield insights into optimal organizational boundaries.

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Bibliographic Reference

Shin, D and Strausz, R. 2014. 'Delegation and Dynamic Incentives'. London, Centre for Economic Policy Research.