Intertemporal common agency and organizational design: How much decentralization?

In common agency, where one agent contracts with several principals, to what extent should the principals cooperate and centralize provision of incentives? If the agency is over contract complements — where an increase in activity for one principal increases the marginal value of contracting with ot...

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Bibliographic Details
Published in:European economic review 1995-08, Vol.39 (7), p.1405-1428
Main Authors: Olsen, Trond E., Torsvik, Gaute
Format: Article
Language:English
Subjects:
Agency theory
Alliances
Centralization
Common agency
Decentralization
Economic incentives
Economic models
Economic theory
Economics
Incentives
Organizational behaviour
Organizational design
Ratchet effect
Studies
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Summary:In common agency, where one agent contracts with several principals, to what extent should the principals cooperate and centralize provision of incentives? If the agency is over contract complements — where an increase in activity for one principal increases the marginal value of contracting with other principals — complete centralization seems optimal, since this internalizes all externalities. We show that this intuition is not generally valid for dynamic agency situations. For although centralization provides more accurate incentives to the agent, it also aggravates the ratchet effect, and this negative effect may dominate. The optimal degree of decentralization is discussed and partly characterized.
ISSN:0014-2921
1873-572X
DOI:10.1016/0014-2921(94)00094-G