Credible Delegation

Posted: 19 Jan 2006

See all articles by Kenneth S. Corts

Kenneth S. Corts

University of Toronto - Rotman School of Management

Darwin V. Neher

Cornerstone Research, Inc. - New York Office

Abstract

We show that the vertical delegation of decision-making authority to agent firms can act as a credible strategic commitment even when contracts are unobservable (or renegotiable) if and only if multilateral delegation is combined with decentralized ownership of the agent firms. In this case, the possibility of renegotiation of other agents' contracts constrains the set of contracts acceptable to each agent. Delegation may induce more or less aggressive behavior, depending on the nature of within-structure competition among the agent firms. Thus, delegationmay be a valuable, credible strategic commitment mechanism when strategies are either substitutes or complements.

Keywords: delegation, strategic commitment, renegotiation

JEL Classification: L2, C7, L1

Suggested Citation

Corts, Kenneth S. and Neher, Darwin V., Credible Delegation. European Economic Review, Vol. 47, No. 3, pp. 395-407, 2003, Available at SSRN: https://ssrn.com/abstract=875470 or http://dx.doi.org/10.2139/ssrn.263550

Kenneth S. Corts (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Darwin V. Neher

Cornerstone Research, Inc. - New York Office ( email )

599 Lexington Avenue
New York, NY 10022
United States

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