Hierarchical Decentralization of Incentive Contracts
Coauthor(s): Dilip Mookherjee, Stefan Reichelstein.
Agents in a hierarchy are commonly delegated authority to communicate and contract with agents at lower levels. While delegation reduces the burden of communication and information processing on the principal, it also introduces additional incentive problems. We find that with sufficient monitoring of the agents' contributions to joint production, and a particular sequence of contracting, the additional incentive problems inherent in delegation can be completely resolved. These conditions are generally also necessary of delegation to achieve second-best results.
Source: RAND Journal of Economics
Melumad, Nahum, Dilip Mookherjee, and Stefan Reichelstein. "Hierarchical Decentralization of Incentive Contracts." RAND Journal of Economics 26, no. 4 (Winter 1995): 654-72.