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Authority and Incentives in Organizations
Author(s) -
Kräkel Matthias
Publication year - 2017
Publication title -
the scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/sjoe.12172
Subject(s) - incentive , delegation , corporation , externality , economics , division of labour , division (mathematics) , control (management) , microeconomics , business , finance , management , market economy , arithmetic , mathematics
I consider a corporation that consists of an owner, a manager, and two divisions. There exist externalities between the divisions: if a division behaves cooperatively, its success will increase the performance of the other division. The owner creates monetary effort incentives and allocates decision authority over the divisions. I characterize how externalities and benefits of control determine the corporation's optimal organization. The introduction of endogenous incentives changes the major findings of the existing literature, because then concentrated delegation of authority over both divisions to one of the division heads will be optimal if cooperation is important and divisions are difficult to incentivize.