On the costs and benefits of delegation in organizations

We examine the question whether a decision should be delegated to a subordinate and whether this is done efficiently. We illustrate in a dynamic principal-agent model that delegation is useful for several reasons. First, it serves to test agents with unknown ability. Then, it may improve an agent's motivation when carrying out decisions as successful outcomes improve his reputation and hence his future wages. Costs of delegation arise from the risk of having decisions of lower quality and because after having made a successful decision a subordinate's power is increased. The latter effect may lead to inefficient delegation decisions.