Authority and Incentives in Organizations

45 Pages Posted: 23 Mar 2013

See all articles by Matthias Kräkel

Matthias Kräkel

University of Bonn - Economic Science Area; Institute for the Study of Labor (IZA)

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Abstract

The paper analyzes how the choice of organizational structure leads to the best compromise between controlling behavior based on authority rights and minimizing costs for implementing high efforts. Concentrated delegation and hierarchical delegation turn out to be never an optimal compromise. If the CEO is more efficient than the division heads (i.e., the CEO's costs from exerting high effort are smaller than those of the division heads), the owner will prefer full delegation to the divisions to replace high incentive pay to the division heads by incentives based on private benefits of control. In that situation, decentralization is the optimal form of full delegation given that selfish behavior is more important than cooperation, but cross-authority delegation is optimal for cooperation being crucial. If, however, the division heads are clearly more efficient than the CEO, the owner will choose centralization given that cooperation is the dominating issue, but partial delegation if selfish behavior is crucial.

Keywords: decentralization, contracts, centralization, authority, moral hazard

JEL Classification: D21, D23, D86, L22

Suggested Citation

Kräkel, Matthias, Authority and Incentives in Organizations. IZA Discussion Paper No. 7271, Available at SSRN: https://ssrn.com/abstract=2238304

Matthias Kräkel (Contact Author)

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