Uncertainty, Delegation and Incentives

48 Pages Posted: 6 Jul 2007 Last revised: 20 Dec 2021

See all articles by Heikki Rantakari

Heikki Rantakari

University of Rochester - Simon Business School

Date Written: March 25, 2008


How does imperfect contractibility of preferences influence the governance of a contractual relationship? We analyze a two-party decision-making problem where the optimal decision is unknown at the time of contracting. In consequence, instead of contracting on the decision directly, the parties need to design a contract that will induce good decision-making in the future. We examine how environmental uncertainty, quality of available performance measures and interim access to information influence the joint determination of the allocation of authority, use of performance pay and direct controls. We use the results from the model to cast light on (i) the conflicting empirical evidence on the risk-incentives tradeoff found in work on executive compensation and franchising, (ii) complementarities in organizational design and (iii) determinants of the choice to delegate.

Keywords: decision-making, uncertainty, incentives

JEL Classification: D82, L23

Suggested Citation

Rantakari, Heikki, Uncertainty, Delegation and Incentives (March 25, 2008). Available at SSRN: https://ssrn.com/abstract=998339 or http://dx.doi.org/10.2139/ssrn.998339

Heikki Rantakari (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

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