Autor: Coleff Joaquín(*), Ivars Juan Sebastian(**)
Institución: (*)UNLP, (**)Science Po
JEL: C70, D23, L22
The main aim of this paper is to analyze the internal organization of a firm that comprises an Owner, a CEO, and two agents. The main inputs of our model are externalities among divisions’ projects that may require cooperative decisions, costly effort from the CEO and the two division managers, and incomplete contracts on efforts and decisions. We focus on understanding the existence of more than two layers (i.e., three layers called hierarchical delegation) of decision authority in hierarchical organizations. Hierarchical delegation may arise as the best response to the moral hazard behavior of the CEO: as the CEO cannot commit to choose a cooperative decisions over projects, the most convenient organizational design for the firm may be to give a decision right over one project to an agent willing to choose a cooperative decision, generating an additional layer in the organization. The main contribution of this paper is to identify conditions that lead hierarchical delegation as optimal under an incentive perspective, but also to find the driving force of this result.