The Optimality of Delegation under Imperfect Commitment∗

Should a boss (a principal) delegate authority (a decision right) to his or her subordinate (agent) if the subordinate has private informa-tion? This paper answers this question under “imperfect commitment” assumption that compensation schemes are contractable but decisions are not verifiable. Our conclusions are that (i) the principal strictly prefers delegation to centralization if the decision is sufficiently impor-tant to the principal; (ii) the principal should adopt performance-based compensation scheme under both delegation and centralization, but the optimal compensation schemes are quite different; (iii) the prin-cipal more prefers delegation to centralization in comparison with no contract case or complete contract case.