Faculty of Economics and Business Administration Publications Database

Decentralized Task Assignment and Centralized Contracting: On the Optimal Allocation of Authority

Reichmann, Steffen
Volume: 26
Number: 1
Pages: 33 - 55
Month: Spring
ISSN-Print: 1049-2127
Link External Source: Online Version
Year: 2014
Keywords: Task assignment; Incentives; Decision right; Authority; Organizational structure

To provide efficient incentives, the three components of an incentive system (i.e., performance measurement, rewards, and the allocation of decision rights) need to be balanced against each other. In practice, the authority to decide on these components is frequently distributed across hierarchical levels, thus requiring adjusting centralized decisions with regard to decentralized authority. This paper investigates the centralized design of incentive contracts when decision authority, with respect to the allocation of tasks, is delegated to lower hierarchical levels. It provides an analysis of the optimal allocation of authority (i.e., “who should be the boss”) and considers the interdependencies between organizational design choices and the design of optimal incentives.