Delegation of Authority as an Optimal (In)Complete Contract

24 Pages Posted: 14 Sep 2004

See all articles by Andreas Roider

Andreas Roider

University of Regensburg - Department of Economics and Econometrics; IZA Institute of Labor Economics

Date Written: September 2004

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.

Keywords: delegation, decentralization, authority, incomplete contracts, holdup, property rights

JEL Classification: D82, D23, L14, L22

Suggested Citation

Roider, Andreas, Delegation of Authority as an Optimal (In)Complete Contract (September 2004). Available at SSRN: https://ssrn.com/abstract=410220

Andreas Roider (Contact Author)

University of Regensburg - Department of Economics and Econometrics ( email )

Universitaetsstrasse 31
D-93040 Regensburg
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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