Delegation and Performance

Abstract

This paper empirically investigates how the level of authority delegation is related to the performance of an organization. Decentralized, horizontal organizational structure takes advantage of more efficient decision making, mainly due to more efficient use of soft information. The cost of such decentralization is the loss of control and the need to properly incentivise agents who are legitimately given the authority to make decisions. This is the trade-off organization faces when deciding on the level of authority delegation.The effect of authority delegation is studied using empirical data from the banking sector. Different specifications were used to estimate the effect of authority delegation on performance characteristics. Estimates demonstrate that more authority delegated has a positive effect on quantitative measures of bank performance; however, it decreases the quality of decisions taken. Results demonstrate that there is a trade-off between the quantitative and qualitative performance characteristics. While the local bank branch is able to increase loan generation when more authority is delegated to it, there is also some evidence of loan quality deterioration.