The Allocation of Decision-Making Authority when Principal has Reputation Concerns

Tamada, Yasunari and Tsai, Tsung-Sheng (2009): The Allocation of Decision-Making Authority when Principal has Reputation Concerns.

Abstract

This paper analyzes the allocation of decision-making authority when the principal has reputation concerns. The principal can either keep the authority, or delegate it to the agent, who has better information. An outside evaluator who forms the principal's reputation cannot observe who makes the decision. The key feature of this paper is that the principal can in°uence her reputation through her delegation policy. With reputation concerns, we show that the principal tends to keep too much the authority from the evaluator's point of view, even though sometimes her information is not good enough for her to make the decision on her own.

• Item Type: MPRA Paper
• Language: English
• Keywords: Decision-making authority, delegation, reputation concerns
• Subjects: D - Microeconomics > D2 - Production and Organizations > D23 - Organizational Behavior ; Transaction Costs ; Property Rights; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L14 - Transactional Relationships ; Contracts and Reputation ; Networks; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design

References

Aghion, P. and J. Tirole (1997), "Formal and Real Authority in Organizations," Journal of Political Economy 105, 1-29.

Alesina, A. and G. Tabellini (2007), "Bureaucrats or Politicians? Part I: A Single Policy Task," American Economic Review 97, 169-179.

Alesina, A. and G. Tabellini (2008), "Bureaucrats or Politicians? Part II: Multiple Policy Tasks," Journal of Public Economics 92, 426-447.

Camerer, C. and U. Malmendier (2007), \Behavioral Economics of Organization," in Behavioral Economics and Its Applications (ed. P. Diamond and H. Vartiainen), Princeton University Press.

Dessein, W. (2002), "Authority and Communication in Organizations," Review of Economic Studies 69, 811-838.

Esptein, D. and S. O'Halloran (1994), "Administrative Procedures, Information, and Agency Discretion," American Journal of Political Science 38, 697-722.

Esptein, D. and S. O'Halloran (1999), Delegating Power: A Transaction Cost Politics Approach to Policy Making Under Separate Powers. Cambridge: Cambridge University Press.

Gailmard, S. (2002), "Expertise, Subversion, and Bureaucratic Discretion," Journal of Law, Economics, and Organization 18, 536-555.

Harris, M. and A. Raviv (2005), "Allocation of Decision-Making Authority," Review of Finance 9, 353-383.

Holmstrom, B. and J. Ricart i Costa (1986). "Managerial Incentives and Capital Management," Quarterly Journal of Economics 101, 835-60.

Levy, G. (2004), "Anti-Herding and Strategic Consultation," European Economic Review 48, 503-525.

Morris, S. (2001), "Political Correctness," Journal of Political Economy 109, 231-265.

Ottaviani, M. and P. S¿rensen (2006), "Reputational Cheap Talk," Rand Journal of Economics 37, 155-175.

Scharfstein, D. and J. Stein (1990), "Herd Behavior and Investment," American Economic Review 80, 465-479.