Delegation of Task Allocation Authority and the Value of Communication when Performance Measures are Imperfect

Abstract

We consider a team production process where two agents exert non-observable effort in their specialized tasks and an additional task needs to be assigned. After contracting, one agent becomes privately informed about whether he has a comparative cost advantage in the additional task. We investigate when the principal benefits from delegating task-allocation authority to the privately informed agent, implying that the team self-organizes the task assignment. We show that delegation allows the principal to resolve any problems due to private information on effort costs when they are verifiable ex-post. If costs are non-verifiable ex-post and the team performance measure exhibits congruency problems, the principal even wants to delegate more often than under verifiable effort costs. Moreover, we show that the benefit of communication between the privately informed agent and the principal crucially depends on the nature of the congruency problems encountered and that delegation may be preferred over truthful communication.