Organizational Design and Career Concerns

Abstract: This paper studies organizational design as the allocation of decision rights, primarily focusing on its interplay with agents’ career motives. I identify a new tradeoff between delegation and centralization, which arises solely from career concerns: When delegated, an agent takes inefficient actions at the cost of a principal but also works harder ex post to implement his project, in order to manipulate the market expectations of his ability. Compared to the existing literature, the contribution of the paper is two-fold. First, it endogenizes the agent’s bias as a result of career concerns. Second, more importantly, it uncovers a new link between organizational design and the implementation of a decision. Both of these features are in sharp contrast to the vast majority of the existing studies, which takes the agent’s bias as given and abstracts away from the implementation stage of a decision process. Specifically, delegation can be strictly optimal in the present framework even if the agent has no information advantage over the principal. As an application, I extend the baseline model to a multi-task setting, and find an interaction effect between organizational design and job design. Specifically, delegation to a specialized agent can be optimal even when neither delegation without specialization nor specialization without delegation is beneficial.