July 2005

IZA DP No. 1669: Division of Labour and Directed Production

published in: B.E. Journal of Economic Analysis and Policy: Topics in Economic Analysis and Policy , 2008, 8 (1), Article 27

We examine a situation where efforts on different tasks positively affect production but are not separately verifiable and where the manager (principal) and the worker (agent) have different ideas about how production should be carried out: agents prefer a less efficient way of production. We show that by dividing labour (assigning tasks to different agents and verifying that agents do not carry out tasks to which they are not assigned), it is possible for the principal to implement the efficient way of production. Colluding agents can undermine this implementation. However, if agents have different abilities, collusion can be prevented by a specific assignment of agents to tasks.