Task assignment, incentives and technological factors

Abstract In this paper, we examine the allocation of tasks between a principal and an agent considering their incentives to provide effort, their different abilities in handling tasks, and transmission costs. We focus our attention on two tasks: the first may be handled by the principal or by the agent, whereas the second is necessarily carried out by the agent. Under a fully decentralised organisation, the agent performs both tasks, whereas, under partial delegation, the principal handles the first task and transfers the outcome to the agent who handles the second task. Assuming technological complementarities, from our analysis it emerges that, if there is imperfect observability of effort, full delegation is better at eliciting effort by the agent in the second task, whereas, in comparison with partial delegation, it lowers effort in the first task. Although with contractible effort, the choice between the two organisational forms depends only on transmission costs and on the relative ability of its members, when moral hazard problems are taken into account, the organisational choice is related to the relative importance played by the two tasks in production. If the agent's task is relatively important in production, full delegation, encouraging a higher level of effort in this task, may be optimal, even if technological factors favour partial delegation. Copyright © 2008 John Wiley & Sons, Ltd.