The Organization of Delegated Expertise

This paper proposes a theory of the optimal organization of expertise. We develop a Principle of Incentives for Expertise: an expert is rewarded if his recommendation is confirmed either by the facts or by other experts’ recommendations. Building on this Principle, we show that agency costs of delegated expertise exhibit diseconomies of scale. Possible organizational responses to this problem include basing decisions on a less than optimal amount of information, and relying on multiple experts. ∗We thank Mark Armstrong, Hendrik Hakenes, Li Hui, Rongkang Kang, Godfrey Keller, Jean-Jacques Laffont, Patrick Legros, Jonathan Levin, Gyöngyi Lóránth, George Mailath, Eric Maskin, Lisa Oliver, Marco Ottaviani, Jean Tirole, and Dimitri Vayanos as well as seminar participants at Brussels (ECARES), CERNA Paris, HEC Paris, London Business School, the LAMES in Sao Paulo, Munich, Oxford, and Wuhan University for discussions and comments. We also thank Cathy Wilson for her help in preparing the manuscript. All errors are ours. ‡London Business School and CEPR. §Université de Toulouse I (GREMAQ, IDEI), Institut Universitaire de France, and CEPR.