Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/74793
Authors: 
Bester, Helmut
Krähmer, Daniel
Year of Publication: 
2013
Series/Report no.: 
School of Business & Economics, Discussion Paper: Economics, Freie Universität Berlin 2013/5
Abstract: 
We analyze the optimal allocation of authority in an organization whose members have conflicting preferences. One party has decision-relevant private information, and the party who obtains authority decides in a self-interested way. As a novel element in the literature on decision rights, we consider exit option contracts: the party without decision rights is entitled to prematurely terminate the relation after the other party's choice. We show that under such a contract it is always optimal to assign authority to the informed and not to the uninformed party, irrespective of the parties' conflict of interest. Indeed, the first-best efficient solution can be obtained by such a contract.
Subjects: 
authority
decision rights
exit options
incomplete contracts
asymmetric information
JEL: 
D23
D82
D86
Document Type: 
Working Paper

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