Effort Observability, Incentive Systems, and Organizational Forms

17 Pages Posted: 24 Aug 2010

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

Abstract

This paper analyses the choice between a centralized and a decentralized organizational structure focusing on the relationship existing between the allocation of decision rights, the degree of observability of effort and the use of different compensation systems. Profitable production is realized thanks to good information being available during the project selection stage and hard work being performed in the implementation stage. Selection of projects may be made by the principal (hierarchy) or by the agent (delegation). Under the hierarchical system, the principal's participation in the design of projects allows her to gather useful information for the design of a more accurate compensation system. Therefore, we analyse the trade-off between optimal use of available information and accuracy of incentive systems, which emerges in the choice of organizational form.

Suggested Citation

De Paola, Maria and Scoppa, Vincenzo, Effort Observability, Incentive Systems, and Organizational Forms. LABOUR, Vol. 24, Issue 3, pp. 221-237, September 2010. Available at SSRN: https://ssrn.com/abstract=1661418 or http://dx.doi.org/10.1111/j.1467-9914.2010.00490.x

Maria De Paola (Contact Author)

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

via Ponte Bucci
Arcavacata di Rende, Cosenza 87036
Italy

Vincenzo Scoppa

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

via Ponte Bucci
Arcavacata di Rende, Cosenza 87036
Italy

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