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Uncertainty, Delegation and Incentives

Heikki Rantakari

University of Rochester - Simon Business School

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.

Number of Pages in PDF File: 48

Keywords: decision-making, uncertainty, incentives

JEL Classification: D82, L23

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Date posted: July 6, 2007 ; Last revised: March 26, 2008

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

Contact Information

Heikki Rantakari (Contact Author)
University of Rochester - Simon Business School ( email )
Rochester, NY 14627
United States

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