Abstract:

We consider a model of hierarchical organizations in which agents have the option ofreducing the probability of failure by investing towards their decisions. A mechanismspecifies a distribution of sanctions in case of failure across the levels of the hierarchy. Itis said to be investment-inducing if it induces all agents to invest in equilibrium. It is saidto be optimal if it does so at minimal total punishment. We characterize optimalinvestment-inducing mechanisms in several versions of our benchmark model. Inparticular we refer to the problem of allocating individuals with diverse qualifications todifferent levels of the hierarchy as well as allocating tasks of different importance acrossdifferent hierarchy levels. We also address the issue of incentive-optimal hierarchyarchitectures.

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