authority, delegation, incentives, moral hazard, principal-agent problem, limited liability
332 Financial economics
Also published in
This paper analyses the relation between authority and incentives. It extends
the standard principal-agent model by a project selection stage in which the prin-
cipal can either delegate the choice of project to the agent or keep the authority.
The agent's subsequent choice of effort depends both on monetary incentives and
the selected project. We find that the consideration of effort incentives makes the
principal less likely to delegate the authority over projects to the agent. In fact, if
the agent is protected by limited liability, delegation is never optimal.
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