Delegation and Nonmonetary Incentives

49 Pages Posted: 10 Dec 2015  

Date Written: December 4, 2015

Abstract

In many contracting settings, actions costly to one party but with no direct benefits to the other (money-burning) may be part of the explicit or implicit contract. A leading example is bureaucratic procedures in an employer-employee relationship. We study a model of delegation with an informed agent, where the principal may impose money-burning on the agent as a function of the agent’s choice of action, and show that money-burning may be part of the optimal contract. This result holds even if action-contingent monetary transfers are possible, as long as transfers from the principal to the agent are bounded from below (as in limited liability or minimal wage requirements). In fact, the optimal contract can involve a combination of both efficient monetary incentives and inefficient nonmonetary incentives through money burning. Our model delivers some results novel to the delegation literature. First, money-burning is more likely if the principal is more sensitive to the choice of action than the agent. This is consistent with the perception that there is more bureaucratization in large organizations. Second, money-burning is more likely if the agent’s limited liability constraint is tighter relative to his participation constraint. This implies that a higher minimum wage distorts employment contracts towards using socially wasteful nonmonetary incentives, leading to a Pareto inferior outcome as the agent is still held down to his reservation value through increased money burning.

The appendices for this paper are available at the following URL: http://ssrn.com/abstract=2700851

Keywords: delegation, organizational procedures, money burning

JEL Classification: D23, D82, D86

Suggested Citation

Ambrus, Attila and Egorov, Georgy, Delegation and Nonmonetary Incentives (December 4, 2015). Economic Research Initiatives at Duke (ERID) Working Paper No. 200. Available at SSRN: https://ssrn.com/abstract=2700821 or http://dx.doi.org/10.2139/ssrn.2700821

Attila Ambrus (Contact Author)

Duke University - Department of Economics ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

Georgy Egorov

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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