Hidden Action, Identification, and Organization Design

Incentives often fail in inducing economic agents to engage in a desirableactivity; implementability is restricted. What restricts implementability?When does re-organization help to overcome this restriction?This paper shows that any restriction of implementabilityis caused by an identification problem. It also describes organizationsthat can solve this identification problem and provides conditions underwhich such organisations exist. Applying the findings to establishedand new moral hazard models yields insights into optimal organizationdesign, uncovers the reason why certain organization designs,such as advocacy or specialization, overcome restricted implementability,and formalizes a wide-spread type of multitasking problem.[...]