Delegation of strategic decision-making authority to middle managers

Traditional approaches have taken centralized decisions about a firm’s strategy as given, whereas the implementation of a strategy is delegated to lower hierarchical levels, e.g., middle managers. Empirical studies and the literature on strategic management, however, suggest that the implementation success crucially depends on the middle managers’ commitment to the formulated strategy which can be increased by involving the middle manager in the strategy formulation process. The participation or responsibility of middle managers in the strategy formulation process is viewed as a major source of incentives for middle managers to support and advance the successful implementation of a strategy. This paper analyzes a firm’s decision whether to delegate decision authority with respect to strategic issues to middle managers in a moral hazard framework in which the middle manager is also responsible for the implementation of a strategy. It provides conditions under which delegation is preferred over centralized strategic decision-making and derives optimal contracts for the middle manager under each organizational setting. Moreover, it derives the result that the value of additional information depends on how strategic decision-making authority is organized within a firm.