Authority and Incentives in Organizations

17 Pages Posted: 26 Mar 2017

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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Date Written: April 2017


I consider a corporation that consists of an owner, a manager, and two divisions. There exist externalities between the divisions: if a division behaves cooperatively, its success will increase the performance of the other division. The owner creates monetary effort incentives and allocates decision authority over the divisions. I characterize how externalities and benefits of control determine the corporation's optimal organization. The introduction of endogenous incentives changes the major findings of the existing literature, because then concentrated delegation of authority over both divisions to one of the division heads will be optimal if cooperation is important and divisions are difficult to incentivize.

Keywords: Centralization, contracts, decentralization, moral hazard

JEL Classification: D21, D23, D86, L22

Suggested Citation

Kräkel, Matthias, Authority and Incentives in Organizations (April 2017). The Scandinavian Journal of Economics, Vol. 119, Issue 2, pp. 295-311, 2017, Available at SSRN: or

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