Why Do Managers Under-Delegate? A Co-Productive Principal-Agent Model

48 Pages Posted: 26 Jul 2021 Last revised: 19 Dec 2023

See all articles by Guillaume Roels

Guillaume Roels

INSEAD - Technology and Operations Management

Vladimir Smirnov

The University of Sydney - School of Economics

Ilia Tsetlin

INSEAD

Andrew Wait

University of Sydney

Date Written: December 19, 2023

Abstract

In practice, principal-agent relationships often involve opportunities for co-production, potentially giving rise to different operating modes: single execution, delegated execution, or collaborative execution. We study the genesis of teams in this context. Specifically, we consider a principal who initiates a new project (e.g., an entrepreneurial venture) and contemplates whether to partner with an agent, and if so, what share of reward to offer. We find that principals tend to partner too little; and when they do, they tend to contribute too little. Hence, the delegated execution operating mode implicitly assumed by canonical principal-agent models is observed rather rarely in our setting; and it is not because workers collaborate more, but rather because principals work on their own too much. We also find that the co-productive nature of the relationship may hurt not only the principal, but also the total value. Specifically, the principal may need to offer the agent a higher share than in the canonical principal-agent model because of the co-productive nature of the work. Also, the principal may benefit from having a high cost to avoid being involved in co-production. Lastly, the co-productive nature of the work may result in lower total value because the principal completely disregards the agent's payoff when choosing to work alone. To improve efficiency, we recommend preventing principals from committing to an effort level before the agent. Higher surplus can also be achieved by mandating the principal to engage the agent and pay them either all or half of the equity.

Keywords: Principal-agent, Co-production, Teams, Double moral Hazard, Contracting, Delegation, Entrepreneurship

Suggested Citation

Roels, Guillaume and Smirnov, Vladimir and Tsetlin, Ilia and Wait, Andrew, Why Do Managers Under-Delegate? A Co-Productive Principal-Agent Model (December 19, 2023). INSEAD Working Paper No. 2023/73/TOM/DSC, Available at SSRN: https://ssrn.com/abstract=3892218 or http://dx.doi.org/10.2139/ssrn.3892218

Guillaume Roels (Contact Author)

INSEAD - Technology and Operations Management ( email )

Boulevard de Constance
77 305 Fontainebleau Cedex
France

Vladimir Smirnov

The University of Sydney - School of Economics ( email )

Rm 370 Merewether (H04)
The University of Sydney
Sydney, NSW 2006 2008
Australia

Ilia Tsetlin

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

Andrew Wait

University of Sydney ( email )

School of Economics
University of Sydney, NSW 2006
Australia
+61-2-9351-3060 (Phone)
+61-2-9351-4341 (Fax)

HOME PAGE: http://sydney.edu.au/arts/economics/

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