INTERTEMPORAL COMMON AGENCY AND ORGANIZATIONAL DESIGN - HOW MUCH DECENTRALIZATION

In common agency, where one agent contracts with several principals, t o what extent should the principals cooperate and centralize provision of incentives? If the agency is over contract complements - where an increase in activity for one principal increases the marginal value of contracting with other principals - complete centralization seems opt imal, since this internalizes all externalities. We show that this int uition is not generally valid for dynamic agency situations. For altho ugh centralization provides more accurate incentives to the agent, it also aggravates the ratchet effect, and this negative effect may domin ate. The optimal degree of decentralization is discussed and partly ch aracterized.