First Draft: May 11, 1999
This Draft: Sept 29, 1999 | Wouter DESSEIN
This paper explores the concept of delegation as an alternative to communication within organizations. It argues that a principal may delegate decision-making authority to an agent (such as senior or middle management) to avoid the noisy communication and information loss that can arise from differences in objectives between the principal and the agent. The paper develops a model where the principal must screen among projects, and the agent has superior information but systematic biases in preferences. The key trade-off is between the loss of information due to noisy communication and the loss of control due to delegation. The analysis shows that delegation is optimal when the principal's preferences are sufficiently congruent with the agent's, when the principal faces more uncertainty, and when the principal is more risk-averse. The paper also discusses the role of intermediaries with intermediate objectives, which can help balance the trade-off between delegation and communication. The results highlight the importance of aligning objectives and the potential benefits of delegation in certain contexts.This paper explores the concept of delegation as an alternative to communication within organizations. It argues that a principal may delegate decision-making authority to an agent (such as senior or middle management) to avoid the noisy communication and information loss that can arise from differences in objectives between the principal and the agent. The paper develops a model where the principal must screen among projects, and the agent has superior information but systematic biases in preferences. The key trade-off is between the loss of information due to noisy communication and the loss of control due to delegation. The analysis shows that delegation is optimal when the principal's preferences are sufficiently congruent with the agent's, when the principal faces more uncertainty, and when the principal is more risk-averse. The paper also discusses the role of intermediaries with intermediate objectives, which can help balance the trade-off between delegation and communication. The results highlight the importance of aligning objectives and the potential benefits of delegation in certain contexts.