Information, authority, and corporate hierarchies

Chongwoo Choe, In-Uck Park

Research output: Contribution to journalArticleResearchpeer-review

Abstract

This paper studies a model with one principal and two agents where one agent can gather information that is valuable for the principala??s project choice and the other agent provides effort to the chosen project. Defining authority as the right to choose a project and contract with the agent who does not directly contract with the principal, we ask when the principal can benefit from delegating authority to one of the agents. We show that beneficial delegation is possible when complete contracts cannot be written and authority is delegated to the information gatherer. The benefits of delegation stem from either efficiency gains or reduction in rent to the information gatherer. This can be viewed as a reasonable portrayal of a typical corporate hierarchy where top managers are delegated the authority to make strategic decisions and to contract with other employees.
Original languageEnglish
Pages (from-to)1 - 37
Number of pages37
JournalB.E. Journal of Theoretical Economics
Volume11
Issue number1
DOIs
Publication statusPublished - 2011

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