Abstract
We consider a simple hierarchical contracting problem where the principal contracts the top manager who in turn subcontracts many middle managers. We show that that the top managerial contract is lower-powered and middle managerial contracts are higher-powered in incentives than predicted by the standard agency model. Consequently, at optimum, middle managers work harder, and the CEO (top manager) works less than implied by their standard second-best contracts. Moreover, the CEO contract sensitivity decreases as the number of middle managers increases.
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