The Organization of Delegated Expertise

Abstract

This Paper proposes a theory of the optimal organization of delegated expertise. For incentive purposes, a principal should reward an expert when their recommendation is confirmed either by the facts or by other experts' recommendations. With a single expert, we show that the agency costs of delegated expertise exhibit diseconomies of scale. Possible organizational responses to this problem include basing decisions on a less than optimal amount of information, and relying on multiple experts. We analyze the source of gains from having multiple experts in different contracting environments corresponding to different nexi of collusion between the principal and/or the experts.

Keywords: Expertise, organization, collusion

JEL Classification: D80