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ifo Institut – Leibniz-Institut für Wirtschaftsforschung an der Universität München >
CESifo Working Papers, CESifo Group Munich >
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http://hdl.handle.net/10419/38953
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| Title: | | Incentives, reputation and the allocation of authority  |
| Authors: | | Englmaier, Florian Filipi, Ales Singh, Ravi |
| Issue Date: | | 2010 |
| Series/Report no.: | | CESifo working paper Empirical and Theoretical Methods 2979 |
| Abstract: | | We address the question how much authority a principal should delegate to a manager with conflicting interests and uncertain ability in a context in which the manager has both compensation-based and reputational incentives. The optimal level of authority balances the value of the manager's decision-making expertise against the cost of ensuring that the manager uses his discretion productively. Reputational incentives reduce the necessary monetary incentives to discourage purely opportunistic behavior, but may cause the manager to pursue conservative courses of action to preserve his reputation. This undermines the benefits of delegating control, leading to decreased managerial authority and stronger monetary incentives. When the principal can commit to long-term contracts, she eliminates this conservative bias by rewarding a successful manager with greater future compensation and authority than would be optimal in a static setting. Early in the relationship the principal may delegate additional authority in order to screen for managers of high ability. |
| Subjects: | | agency problems delegation compensation contracts job design career concerns managerial conservatism |
| JEL: | | D86 L14 L23 M52 M54 |
| Document Type: | | Working Paper |
| Appears in Collections: | | CESifo Working Papers, CESifo Group Munich
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