It is natural to suppose that delegation and incentives are complementary
both in the sense that when more decisions are delegated to
a lower level of an organizational hierarchy, more use should be made
of incentives at that level, and in the sense that more use of incentives
should be accompanied by more delegation. This issue is analyzed
within a Principal-Agent framework in which there are two decisions
to be made: an effort decision which can only be made by the Agent,
and some other decision which can be made by either the Principal
(i.e. be centralized) or by the Agent (i.e. be delegated). Within this
framework it is shown that delegation and incentives are not necessarily
complementary instruments; some decisions should be centralized when
incentives are introduced.