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Title:Incentives, reputation and the allocation of authority PDF Logo
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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