The Allocation of Decision Authority Revisited: A Simple Analysis of Three-Stage Decision Processes

Abstract

We study a three-stage decision process that consists of information acquisition, project choice, and execution of the selected project. A principal wants to choose and implement a proactive project, and hires an agent who chooses a costly effort at the information acquisition stage as well as a costly effort at the execution stage. What the principal can do at the beginning is the allocation of the formal decision authority over project choice, either to herself or the agent. We show that the principal may choose to delegate decision authority to the agent, however unlikely the interest of the agent is to be congruent with her interest, or however competent and experienced she is. We provide several testable predictions. (i) Delegation is more likely as the manager has discretion over both information acquisition and implementation. (ii) Delegation is less likely as opportunities for compromising improve. (iii) Whether or not the parties agree about the status quo matters: In particular, if their preferences about the default decisions differ, the organization is more likely to be decentralized for new project development as their interests are less likely to be congruent.