Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/96830
Authors: 
Shin, Dongsoo
Strausz, Roland
Year of Publication: 
2014
Series/Report no.: 
CESifo Working Paper 4774
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.
Subjects: 
agency
delegation
dynamic incentives
limited commitment
JEL: 
D82
D86
L22
Document Type: 
Working Paper

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