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 su
fficient monitoring of the agents' contributions to joint production,
and a particular sequence of contracting, the additional incentive pro
blems inherent in delegation can be completely resolved. These conditi
ons are generally also necessary for delegation to achieve second-best
results.