The effect of delegation of decision rights and control: the case of lending decisions for small firms

Abstract

Principals have formal authority but that does not necessarily imply that they have real authority. Given that lower-level agents collect private information about local customers and markets that is valuable for decision making, real authority over decisions in many cases resides with lower-level agents. To assure that local information is utilized in decisions, firms often delegate formal authority to the agents (Jensen and Meckling, 1992; Aghion and Tirole, 1997) and use Management Control Systems (MCS) to enhance the likelihood that agents make decisions congruent with firms’ objectives. Centralization of formal authority affects the communication between lower-level agents and the firm if the objectives are sufficiently incongruent as agents are concerned that their decisions will be overruled when principals become informed (Aghion and Tirole, 1997). This study examines the effects of allocation of decision rights on decision outcomes.