Delegation and Dynamic Incentives

47 Pages Posted: 22 May 2014

See all articles by Dongsoo Shin

Dongsoo Shin

Santa Clara University - Leavey School of Business

Roland Strausz

Humboldt University of Berlin - School of Business and Economics; Centre for Economic Policy Research (CEPR)

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Date Written: April 21, 2014

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.

Keywords: agency, delegation, dynamic incentives, limited commitment

JEL Classification: D820, D860, L220

Suggested Citation

Shin, Dongsoo and Strausz, Roland, Delegation and Dynamic Incentives (April 21, 2014). CESifo Working Paper Series No. 4774, Available at SSRN: https://ssrn.com/abstract=2439612 or http://dx.doi.org/10.2139/ssrn.2439612

Dongsoo Shin

Santa Clara University - Leavey School of Business ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States

Roland Strausz (Contact Author)

Humboldt University of Berlin - School of Business and Economics ( email )

Spandauer Str. 1
Berlin, D-10099
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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