Separation of ownership from management, multidivisional firm organizations, delegation of production decisions to worker teams, delegation of pricing and advertising decisions to retail franchisers, reliance on intermediaries in trade or finance, and distribution of regulatory authority across different agencies represent examples of organizations that delegate and distribute decision-making authority instead of centralizing it. This paper reviews literature on costs and benefits of delegated decision making in hierarchical organizations or contracting networks with regard to problems of incentives and coordination. It starts by describing incentive and coordination costs of delegation in simple canonical examples of hierarchies where both information and incentives of different decisionmakers differ. One class of models pertain to contexts where the classical Revelation Principle applies, i.e., where costs of contractual complexity, information processing, or communication are absent, agents do not collude, and the mechanism designer can commit to the mechanism. Delegation may conceivably entail a loss of control and coordination arising from the divergence of information and incentives. Sufficient and necessary conditions for this loss to be mitigated entirely include risk neutrality, top-down contracting, and monitoring of transfers or production assignments between subordinates. The next class of models introduces communication costs that restrict the performance of centralized arrangements relative to delegation owing to a resulting loss of flexibility, which has to be traded off against possible control losses of delegation. Finally, consequences of collusion among agents is discussed, which typically enlarge the range of circumstances under which delegation can attain optimal second-best outcomes. The paper concludes with a discussion of the relevance of this theoretical literature to recently emerging empirical studies of industrial organizations where delegated decision making plays an important role: adoption of innovative human resource management practices, new information technologies and retail franchising.

This paper critically examines the hypothesis that layoffs are involuntary in implicit labour contracts because they are used by employers to punish inferior worker performance. In repeated moral hazard situations, workers typically bear risk associated with whether they are chosen to be laid off even though the latter is uninformative about previous effort choices and wages are performance-contingent. However the hypothesis is unsatisfactory as optimal contracts involve involuntary retentions rather than involuntary layoffs in a wide variety of circumstances.

The Grossman-Hart principal-agent model of moral hazard is extended to the multiple agent case to explore the use of relative performance in optimal incentive contracting. Under the assumption that the principal chooses incentive schemes to implement agent actions as Nash equilibria, necessary and sufficient conditions are derived for the optimality of independent contracts, of rank-order tournaments, and for attainability of the first-best. In this context the relation of the principal's welfare to the correlation between the underlying randomness in outputs of different agents is also investigated. Finally, some problems with the Nash equilibrium implementation assumption are discussed.

Internal control, Budgeting, Hierarchical organization, Managerial accounting system

Learning-by-doing and increasing returns are often perceived to have similar implications for market structure and conduct. We analyse this in the context of an infinite-horizon price-setting game. Learning is shown to not reduce the viability of market-sharing collusion between a given number of firms, whereas intra-period increasing returns invariably does. We subsequently develop a model where the number of active firms is determined endogenously, under the assumption that the post-entry game is collusive. In this model, learning has no effect on concentration, while scale economies increase concentration.

Consider the problem of Bayesian implementation, i.e., of constructing mechanisms with the property that all Bayesian equilibrium outcomes agree with a given choice rule. We show that a general procedure is to start with an incentive-compatible revelation mechanism, and then augment agents' message spaces in order to eliminate undesired equilibria. Specifically, we present an Augmented Revelation Principle, which states that if there exists any mechanism that implements a given choice rule, then an augmented revelation mechanism will also implement it. This principle enables us to obtain necessary conditions for implementation. For a large class of environments these conditions are also sufficient.

We study a general equilibrium efficiency wage model characterized by fully optimizing agents, flexible prices, and imperfect information. The model has a unique competitive equilibrium with underemployment in a sector (called manufacturing) with efficiency wages, relative to a self-employment sector. Since prices are flexible, the multiplier of manufacturing output with respect to autonomous demand changes may or may not exceed unity: demand changes lead to price effects as well as income effects that work opposite each other. Nevertheless, there always exist government policies that achieve Pareto improvements by switching demand toward the manufacturing sector. Optimal demand-switching policies are explicitly characterized.

In a one principal two-agent model with adverse selection and collusion among agents, we show that delegating to one agent the right to subcontract with the other agent always earns lower profit for the principal compared with centralized contracting. Delegation to an intermediary is also not in the principal’s interest if the agents supply substitutes. It can be beneficial if the agents produce complements and the intermediary is well informed. Earlier versions of this paper have previously been circulated under different

We consider a principal-agent model to examine the effectiveness of responsibility centers, in particular cost or profit centers. We show that rather than contracting with each agent directly, the principal can create equally powerful incentives by setting up a responsibility center structure. The principal contracts with only the ‘manager’ of the center and delegates contracting with other agents and coordinating their activities. The principal then must monitor some measure of financial performance such as the center's cost of profit. We also find that responsibility centers dominate direct contracting with the agents when communication is limited.