Full versus Partial Delegation in the Presence of an Ingcongruent Performance Measure

We consider a moral hazard type agency problem. Two tasks need to be performed within the agency. The risk neutral principal can either delegate both tasks to an agent or perform one of the tasks himself. As the principal s surplus is not contractible by assumption, the incentive contract offered to the agent needs to be based on an incongruent performance measure. Agency costs arise from a risk and incentive trade-off as well as from a congruity problem.

Establishing that the relation of sensitivity to productivity ratios to one another in both tasks is crucial for the delegation choice, we obtain the following results: Full delegation dominates partial delegation in settings where scaling of incentives effectively reduces agency costs and cost of risk is moderate. Partial delegation is preferred if alignment of incentives reduces the congruity problem and becomes increasingly favorable the higher the cost of risk.