Why Do Managers Under-Delegate? A Co-Productive Principal-Agent Model (Revision 1 )

In practice, principal-agent relationships often involve opportunities for co-production, potentially giving rise to different operating modes: single execution, delegated execution, or collaborative execution. The authors study the genesis of teams in this context. Specifically, we consider a principal who initiates a new project (e.g., an entrepreneurial venture) and contemplates whether to partner with an agent, and if so, what share of reward to offer. The authors find that principals tend to partner too little; and when they do, they tend to contribute too little. Hence, the delegated execution operating mode implicitly assumed by canonical principal-agent models is observed rather rarely in this setting; and it is not because workers collaborate more, but rather because principals work on their own too much. The authors also find that the co-productive nature of the relationship may hurt not only the principal, but also the total value. Specifically, the principal may need to offer the agent a higher share than in the canonical principal-agent model because of the co-productive nature of the work. Also, the principal may benefit from having a high cost to avoid being involved in co-production. Lastly, the co-productive nature of the work may result in lower total value because the principal completely disregards the agent's payoff when choosing to work alone. To improve efficiency, the authors recommend preventing principals from committing to an effort level before the agent. Higher surplus can also be achieved by mandating the principal to engage the agent and pay them either all or half of the equity.