Delegation Versus Centralization: The Role of Externalities
15 Pages Posted: 28 Nov 2006
Date Written: March 2006
We study a simple contracting game with a principal and two agents. Contracts exert an externalities on non contractors. The principal can either contract both agents in a centralized manner, or delegate one agent to contract the other. We show that the choice of the principal depends on the sign of the externality. If this is positive, the principal prefers to delegate as long as the agency costs are not too high; if the externality is negative, the principal prefers to centralize for all sizes of agency costs.
Keywords: Contracts, Externalities, Centralization, Delegation
JEL Classification: D02, D23, C71, C72
Suggested Citation: Suggested Citation