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Delegation Versus Centralization: The Role of Externalities
Sergio Currarini University of Venice - Department of Economics; Fondazione Eni Enrico Mattei (FEEM), Milan Francesco Feri University of Innsbruck - Department of Economics March 2006 University Ca' Foscari of Venice Economics Research Paper No. 15/06 Abstract: We study a simple contracting game with a principal and two agents. Contracts exert an externalities on non contractors. The principal can either contract both agents in a centralized manner, or delegate one agent to contract the other. We show that the choice of the principal depends on the sign of the externality. If this is positive, the principal prefers to delegate as long as the agency costs are not too high; if the externality is negative, the principal prefers to centralize for all sizes of agency costs.
Keywords: Contracts, Externalities, Centralization, Delegation JEL Classifications: D02, D23, C71, C72 Working Paper SeriesDate posted: November 28, 2006 ; Last revised: November 28, 2006Suggested CitationContact Information
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