On Delegation under Relational Contracts

In this paper, a principal's decision between delegating two tasks or handling one of the two tasks herself is analyzed. We assume that there exists no objective performance measure so that the principal must solely rely on relational contracts (informal agreements sustained by the value of future relationships) as an incentive device. It is found that the principal can commit herself to honor the relational contract more effectively if she delegates one task only. This kind of job design is therefore optimal unless the available performance information is rather inaccurate and the discount rate is very low.