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Hierarchic contracting

Sanchez, Miguel A. and Hortala-Vallve, Rafael (2005) Hierarchic contracting. DARP, 73. Suntory and Toyota Centres for Economics and Related Disciplines, London School of Economics and Political Science, London, UK.

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Abstract

We analyze the contracting structure in a moral hazard setting with several agents where output is produced jointly and is the only contractible variable. Since the salary of each agent is a function of all agents efforts, a positive externality arises between them. This externality is not internalised by a centralised structure where the principal contracts directly with each agent. Instead, we find that a hierarchic structure (i.e. the delegation of "contracting rights" from the principal to the agents) internalises the externality by making agents "residual claimants". Consequently, the second best situation can be improved upon just by changing the contracting structure of the principal-agents relationship. The analysis is relevant to the literature on decentralisation, outsourcing, subcontracting and intra-firm organization.

Item Type: Monograph (Discussion Paper)
Official URL: http://sticerd.lse.ac.uk
Additional Information: © 2005 Miguel A. Sanchez and Rafael Hortala-Vallve
Library of Congress subject classification: H Social Sciences > HD Industries. Land use. Labor
Journal of Economic Literature Classification System: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D80 - General
M - Business Administration and Business Economics; Marketing; Accounting > M1 - Business Administration > M12 - Personnel Management
L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L22 - Firm Organization and Market Structure: Markets vs. Hierarchies; Vertical Integration; Conglomerates; Subsidiaries
J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J30 - General
Sets: Departments > Government
Collections > Economists Online
Research centres and groups > Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 73
Date Deposited: 07 Jul 2008 08:39
URL: http://eprints.lse.ac.uk/6548/

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