Decentralized Task Assignment and Centralized Contracting: On the Optimal Allocation of Authority

Abstract:     
To provide efficient incentives, the three components of an incentive system (i.e., performance measurement, rewards, and the allocation of decision rights) need to be balanced against each other. In practice, the authority to decide on these components is frequently distributed across hierarchical levels, thus requiring to adjust centralized decisions with regard to decentralized authority. This paper investigates the centralized design of incentive contracts when decision authority with respect to the allocation of tasks is delegated to lower hierarchical levels. It provides an analysis of the optimal allocation of authority (i.e., 'who should be the boss') and considers the interdependencies between organizational design choices and the design of optimal incentives.

Number of Pages in PDF File: 41

Keywords: task assignment, incentives, decision right, authority, organizational structure

JEL Classification: M54, M41, L22

working papers series