Leadership Investigate

The Allocation Of Decision-Making Authority When Principal Has Reputation Concerns

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Executive Summary

This paper analyzes the allocation of decision-making authority when the principal has reputation concerns. The principal can either keep the authority, or delegate it to the agent, who has better information. An outside evaluator who forms the principal's reputation cannot observe who makes the decision. The key feature of this paper is that the principal can influence her reputation through her delegation policy. With reputation concerns, the authors show that the principal tends to keep too much the authority from the evaluator's point of view, even though sometimes her information is not good enough for her to make the decision on her own.

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