Delegation and incentives

Abstract

This article analyzes the relation between authority and incentives. It extends the standard principal-agent model by a project selection stage in which the principal 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. Copyright © 2008, RAND.