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

Abstract

ABSTRACT 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.