October 2007

IZA DP No. 3117: Risk, Delegation, and Project Scope

revised version published as 'Delegation, Risk, and Project Scope ' in: Journal of Institutional and Theoretical Economics, 2009, 165 (2), 193-209

This paper studies a partial-contracting model where an agent may provide effort to increase a project’s scope before some later decisions have to be taken. Consistent with existing empirical evidence, we find a positive relationship between exogenous risk and delegation. That is, we show that only if exogenous risk is sufficiently large, the risk-neutral principal may prefer to delegate authority over decisions to the risk-averse agent. Intuitively, for incentive reasons, the principal may optimally want to allow the agent to reduce his risk exposure. Nevertheless, even endogenous risk may be higher when the risk-averse agent has control.