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Delegation of Authority as an Optimal (In)complete Contract

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  • Roider, Andreas

    (University of Regensburg)

Abstract

The present paper aims to contribute to the literature on the foundations of incomplete contracts by providing conditions under which simple delegation of authority is the solution to the complete-contracting problem of the parties. We consider a hold-up framework where both parties profit from an investment that raises the value of an asset. Delegation turns out to be optimal if (i) the decision-dependent parts of the payoffs of the parties are linear in the asset value, and (ii) decisions have no investment-independent effect. If overinvestment might be an issue, delegation, however, with restricted competencies is optimal if some additional continuity requirements are met.

Suggested Citation

  • Roider, Andreas, 2004. "Delegation of Authority as an Optimal (In)complete Contract," IZA Discussion Papers 1298, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp1298
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    Cited by:

    1. Axel Gautier & Dimitri Paolini, 2007. "Delegation and Information Revelation," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 163(4), pages 574-597, December.
    2. Jonathan Treussard, 2005. "Life-Cycle Consumption Plans and Portfolio Policies in a Heath-Jarrow-Morton Economy," Boston University - Department of Economics - Working Papers Series WP2005-033, Boston University - Department of Economics.
    3. Theilen, Bernd, 2009. "Decentralization and the Gains from Monitoring," Working Papers 2072/42863, Universitat Rovira i Virgili, Department of Economics.
    4. Theilen Bernd, 2009. "Monitoring Gains and Decentralization," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 9(1), pages 1-26, September.

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    More about this item

    Keywords

    hold-up; delegation; decentralization; authority; property rights; incomplete contracts;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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