Decentralization and collusion

We consider a model where agents work in sequence on a project, share infor mation not available to the principal, and can collude. Due to limited liab ility the Cease theorem does not apply. The distribution of surplus among t he agents is therefore an important control variable for the principal, whi ch gives us a theory of how to delegate in an organization subject to moral hazard. The optimal distribution of surplus can always be achieved by dele gating in the right way (decentralization) without using "message games." J our-nai of Economic Literature Classification Numbers: D23, D82, L14, L22. (C) 1998 Academic Press.