Managing Authority in Organizations with Choice and Execution
This presentation reports two in-progress projects on theoretical analysis of the optimal allocation of authority in organizations. We consider static and relational contracting models with a principal and an agent, in which the decision process consists of the project choice and the execution effort, and investigate the optimal allocation of authority of the project choice. Each party has an imperfectly informative private signal on the promising project, and successful execution requires the agent's effort. When the principal has authority, her project choice reflects her private signal, which in turn uncertainly influences the agent's confidence of the promising project choice. As the agent's confidence affects his incentive to exert execution effort, it may be optimal to allocate authority to the party who has less precise information on the promising project.