Internalizing Team Production Externalities through Delegation: The British Passenger Rail Sector as an Example

Abstract

We show that in situations of team production, the associated externality between workers can be partially internalized via the delegation of authority of contracting rights, thus improving the overall efficiency of organizations. A delegated structure provides further incentives to individuals in higher tiers of the hierarchy because it makes them residual claimants. Our model sheds light on recent debates about the organization of the British passenger rail sector. © The London School of Economics and Political Science 2009.