Delegation and dynamic incentives. (September 2014)

• Record Type: Journal Article
• Authors: Shin, Dongsoo; Strausz, Roland
• Is Part Of: Rand journal of economics. Volume 45:Number 3(2014:Autumn)
• Page Start: 495
• Page End: 520
• Publication Date: 2014-09
• Subjects: Industrial organization (Economic theory) -- Periodicals; Microeconomics -- Periodicals; Services publics -- Périodiques; Économie industrielle -- Périodiques; Microéconomie -- Périodiques; 338.6
• DOI: 10.1111/1756-2171.12059
• Languages: English
• ISSNs: 0741-6261

Abstract

<abstract abstract-type="main"> <title> <x xml:space="preserve">Abstract</x> </title> <p>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 <italic>play‐hardball effect</italic>, which mitigates an efficient agent's <italic>ratchet</italic> incentive, and a <italic>carrot effect</italic> which reduces an inefficient agent's <italic>take‐the‐money‐and‐run</italic> 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.</p> </abstract>