Incentives and the Delegation of Task Assignment

Abstract

We analyze the optimal interaction between monetary incentives and decision-making authority with respect to task assignment in a production process with two agents, each exerting non-observable effort in their main task. A further task needs to be performed and one agent is privately informed about his costs for this task. The principal can either assign the task herself or delegate the decision-making authority to the informed agent. We find that, if the principal can employ a congruent performance measure to provide the agents with effort incentives, delegation of task assignment and monetary incentives are complements. However, with an incongruent performance measure introducing the problem of effort misallocation across tasks, the relation between the two instruments is not univocal. We thus contribute to explaining the mixed empirical evidence on the relation between incentives and the delegation of decision rights.

Keywords: Delegation, Decision Rights, Incentive Contracts, Performance Measurement, Task Assignment