Basically, the course is a theory of delegation. Now we are going to develop a basic theory of the delegation of a decision making whichassumptions are going to be extended alond the course.
Remember that we have defined delegation as the fact that one person (worker)makes a decision (work) on behalf of another person (entrerpeneur or company).
Elements of the theory:
Endogenous variable
. The entrepreneur
has to chose between two alternatives: delegate or centralize a certain decision.
E
xogenous
variables:
a) Business models, multidecisional theories or the knowledge of the worker and the entrpreneur. In short the theories could be identical orrival (in action).
b) Strategical level of the decision (d) or its place in the sequence of decisions. In short it could be strategical or tactical.
c) Alternative activities of the entrepreneur and the worker.
Results.
We are going to assume that for all the consequences it can be found an equivalent amount of money. Therefore the results are going to beexpressed in monetary terms.
The main consequences of the delegation of one decision are:
i) The use of time of the worker and the entrepreneur. Make decisions is time consuming. The person who decides renounce to do otheractivities.
ii) Possible differences in the decision finnally made. First. The entrepreneur and the worker have their own multidecisional theory or business model.
Second. The endogenous variable is decided. In other words the delegation or centralization of decisions is established.
Third. The model business is implemented and decisions made by the pre-established decisors.
Fourth. Results are obtained.
Intentionally the next part of this subsection is messy, trying to anticipate some doubts that may arise throughout the course.
One could argue that the delegation decision is part of the Business model.
We could agree with that, but for simplification we used otherwording.
At this case, at least we are going to talk about three decisions: delegation, strategical and tactical decision. W
e have consideredthat the delegation is the most strategical decision of these three decisions . We assure that this is the case
for at least the delegation of themost stategical decision . For more tactical decisions its delegation decision could be delayed, but for simplicity we are not going toconsider these cases. Along the course the results will be valued in monetary tems. If you agree that whatever consequence relevant for the entrepreneur (orworker) can be computed or translated to monetary units, then, we are not just talking about making money.
For example, some decisions(dismiss somebody) could affect the psychological welfare of the decisor and the worker. We assume that those extra-costs can beexpressed in monetary terms and easily included in the theory.
Furthermore, along the course (next sections) we are going to make the theory more complex, in the sense that we are going to add more(tactical) decisions linked with the fact that exists delegation like train, coordinate, motivate or transmit information. In these cases we aregoing to introduce further exogenous variables. Centralization:
The entrepreneur expends time making the decision. The opportunity cost is an alternative activity that the decisor can make using thistime. The results obtained with this activity would be W^m
The decision is made in accordance with the entrepreneur's knowldege. Accordingly with the entrepreneur the predicted results of thisdecision is R^c
.
For example, if there is a soleproprietorship, R^c
can be considered the accounting profits of the firm, while R^c-W^m
the economic profits ofthis firm, in the sense that the firm is going to be established when those profits are positive.
Delegation:
The worker expends time making the decision. Instead of making the decision the worker can make an altrenative activity that generates tothe worker a result of W.
The decision is made in accordance with the worker's knowldege. Accordingly with the entrepreneur the predicted results of this decision is R^d
.
For example, if there is a soleproprietorship with an employer, R^d-W can be considered the accounting profits of the firm.
Using economists tradition, we call the profits of delegation to the difference in the economic results that the entrepreneur gets whenchanges from an organization where the decision is centralized to one where this decision is delegated:
Profits of delegation
: PD= (R^d-W ) - (R^c- W^m)= BD -CD
Delegation is going to be produced when its profits are positive (PD>0). Otherwise the decision is going to be centralized.
The profits of delegation can be split between the difference in the opportunity costs of making decisions (Benefits of delegation) anddifferences in the results of the organization (Costs of delegation):
Benefits of delegation
: BD = W^m- W
Costs of delegation
: CD = R^c- R^D


As benefits of delegation (BD) we will understand as the difference between the maximum wage that the employer would be willing to pay tothe worker (W
) to whom a decision is going to be
delegated, minus the minimum wage that the worker wants to charge (W) for having tomake those decisions:
BD= W^m- W
A necessary (but not sufficient) condition for delegation of decisions is that the benefit of the delegation be positive.