CONTRACT COMPLEXITY, INCENTIVES, AND THE VALUE OF DELEGATION

In settings where the revelation principle applies, delegation arrange ments are frequently inferior to centralized decision making, and at b est achieve the same level of performance. This paper studies the valu e of delegation when organizations are constrained by a bound on the n umber of contingencies in any contract. For a principal-agent setting with asymmetric information, toe compare centralized mechanisms where the principal retains sole responsibility for contracting and coordina ting production, with delegation mechanisms where one agent (a manager ) is delegated authority to contract with other agents and coordinate production. Relative to centralization, delegation entails a control l oss, but allows decisions to be more sensitive to the manager's privat e information. We identify circumstances tinder which the flexibility gain outweighs the control loss, so that delegation emerges superior t o centralized contracting.