Technological Improvement and the Decentralization Penalty in a Simple Principal/Agent Model

56 Pages Posted: 4 Apr 2017 Last revised: 25 Oct 2019

See all articles by Ruochen Liang

Ruochen Liang

University of California, Berkeley - Department of Mathematics

Thomas Marschak

University of California, Berkeley - Haas School of Business

Dong Wei

University of California, Berkeley - Department of Economics

Date Written: May 2, 2018

Abstract

We consider the organizer of a firm who compares a decentralized arrangement where divisions are granted total autonomy with an arrangement where perfect monitoring and policing guarantee that all divisions make the choices the organizer wants them to make. We ask: when does improvement in the divisions' technology strengthen the case for decentralization and when does it weaken it? We study this question, for the case of a single division, in a complete-information linear-contract setup. It turns out that there are no simple conditions under which the welfare loss due to decentralization grows (shrinks) when technology improves. Instead, we obtain a variety of results about relations between technology, surplus, the Principal's "generosity" (i.e. the Principal's optimal share of the contract), and "effectiveness" (the effect of a small rise in the share on the Agent's effort).

Suggested Citation

Liang, Ruochen and Marschak, Thomas and Wei, Dong, Technological Improvement and the Decentralization Penalty in a Simple Principal/Agent Model (May 2, 2018). Available at SSRN: https://ssrn.com/abstract=2945702 or http://dx.doi.org/10.2139/ssrn.2945702

Ruochen Liang

University of California, Berkeley - Department of Mathematics ( email )

970 Evans Hall
Berkeley, 94720
United States

Thomas Marschak (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Dong Wei

University of California, Berkeley - Department of Economics ( email )

579 Evans Hall
Berkeley, CA 94709
United States

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