Designing Governance Mechanisms for Knowledge-Intensive

Knowledge-intensive activities are bound by imperfections that limit the provision of incentives, particularly asymmetric information about inputs and unclear definition of outputs. Thus, performance-based incentives are not possible. We then model a contract in which the firm can use the delegation of decision rights to provide incentives. The main argument is that a fine-tuned allocation of decision rights reduces the information rents of a knowledge provider by offsetting her strategic use of the information advantage. We show that when the firm owns strong complementary assets to leverage the provider's knowledge, the delegation of decision rights can fully resolve the limitations due to asymmetric information. When this condition is not met, the provider is offered full autonomy, but it is optimal for the firm to let the most knowledgeable providers go. We also discuss the generality of our approach.