Delegation and Opportunism

We analyze the effect of opportunism on organizational structure. In our moralhazard environment, a principal chooses between a principal-agent organization where the principal itself monitors the output produced by the agent, and a principal-supervisor-agent hierarchy where monitoring is delegated. We find that as long as only one form of opportunism may take place in a principal-supervisor- agent hierarchy, this structure dominates a principal-agent organization. We then show that when multiple forms of opportunism may occur in a principal-supervisor-agent hierarchy, this structure may strictly be dominated by a principal- agent organization.