Organizational Design, Project Selection and Incentives

Journal of Institutional and Theoretical Economics, Vol. 3, pp. 424-449, 2006

Posted: 23 Jan 2009

See all articles by Maria De Paola

Maria De Paola

Università degli Studi della Calabria - Department of Economics and Statistics

Vincenzo Scoppa

Università degli Studi della Calabria - Department of Economics and Statistics

Date Written: January 23, 2006

Abstract

This paper compares benefits and costs related to hierarchical and decentralized organizations in an agency framework. We show that the relative efficiency of hierarchy diminishes in contexts with asymmetric information. When effort is not observable, a performance-related pay is required in order to encourage the agent to work hard. With risk-averse agents the use of this incentive system is more costly under hierarchy rather than under decentralization, in that a higher wage is necessary to elicit effort. From the efficiency comparison of hierarchy and delegation, a trade-off emerges between the advantages deriving from the principal's screening activity and the costs that this induces in terms of higher agency costs.

Keywords: Organizational structure, Incentives, hierarchy, delegation, screening, agency costs

JEL Classification: D23, L22, J33

Suggested Citation

De Paola, Maria and Scoppa, Vincenzo, Organizational Design, Project Selection and Incentives (January 23, 2006). Journal of Institutional and Theoretical Economics, Vol. 3, pp. 424-449, 2006. Available at SSRN: https://ssrn.com/abstract=1331937

Maria De Paola

Università degli Studi della Calabria - Department of Economics and Statistics ( email )

via Ponte Bucci
Arcavacata di Rende, Cosenza 87036
Italy

Vincenzo Scoppa (Contact Author)

Università degli Studi della Calabria - Department of Economics and Statistics ( email )

via Ponte Bucci
Arcavacata di Rende, Cosenza 87036
Italy

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