Managing Authority and Incentives in Relational Contracts

45 Pages Posted: 2 Apr 2020 Last revised: 17 May 2021

See all articles by Akifumi Ishihara

Akifumi Ishihara

University of Tokyo - Institute of Social Science

Date Written: May 16, 2021

Abstract

We consider a relational contracting model in which the parties choose whether to allocate authority either to the principal (centralization) or to the agent (delegation). The party who has authority chooses a project, and the agent exerts effort to successfully execute the project. Delegation combines the control rights of the project and the effort level and allocates them to the agent, which generates both (i) a positive effect to motivate the agent to exert effort through credible choice of a biased project in favour of the agent; and (ii) a negative effect that induces an inefficient project to avoid the agent's deviation to his favourite project. Consequently, delegation (centralization) is inclined to be optimal for parties with low (high) discount factors.

Keywords: Relational Contracts, Authority, Centralization, Delegation, Project Choice

JEL Classification: D23, D86, L14, M12

Suggested Citation

Ishihara, Akifumi, Managing Authority and Incentives in Relational Contracts (May 16, 2021). Available at SSRN: https://ssrn.com/abstract=3551035 or http://dx.doi.org/10.2139/ssrn.3551035

Akifumi Ishihara (Contact Author)

University of Tokyo - Institute of Social Science

Hongo 7-3-1
Bunkyo
Tokyo, TOKYO 113-0033
Japan

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
110
Abstract Views
802
Rank
466,910
PlumX Metrics