Decision Processes, Agency Problems, and Information: An Economic Analysis of Budget Procedures

Abstract

Many organizations attempt to manage agency problems not with incentive contracts but by keeping the principal involved in the decision process, that is, by limiting delegation. This paper develops a model to investigate the economics of several decision processes that are commonly used to set budgets in both the public and private sector. The key tradeoff is that partial delegation allows the principal to reject those projects he dislikes, but causes the agent to distort the information he transmits to the principal.