JOB DESIGN AND INCENTIVES IN HIERARCHIES WITH TEAM PRODUCTION

• Published in: Hitotsubashi journal of commerce & management Vol. 36; no. 1 (36); pp. 1 - 17
• Main Author: Itoh, Hideshi
• Format: Journal Article
• Language: English
• Published: Hitotsubashi University 01-10-2001
• Subjects: Business management; Business studies; Commerce; Contract incentives; Cost efficiency; Cost incentives; Delegation of authority; Hierarchy; Job description; Marginal costs; Moral hazard; Moral hazard models; Performance metrics; Principal-agent theory; Production; Risk aversion; Risk premiums; Teamwork; Work incentives
• ISSN: 0018-2796

The purpose of this paper is to examine how tasks should be allocated in a simple hierarchy consisting of an organizational designer and subordinates, in the framework of a principalagent relationship with moral hazard. Those who are assigned to tasks choose costly and unobservable inputs into the tasks. There is a verifiable and "informative" signal that measures the joint performance: The principal and the agents engage in team production. It is shown that when the principal cannot perform all the tasks and hence must delegate at least one task for some exogenous reasons, she may choose to group all the tasks into an agent's job. Without cost substitutes or complements, the optimal task allocation is either delegating only the task with the smallest responsiveness of effort to incentives, or delegating all the tasks to an agent: There is a substantial non-convexity in delegation decision. It is shown that "complete delegation" is desirable if the team performance is sufficiently easy to measure, or the effort responsiveness to incentives at each task is sufficiently high.