Organizational Design with Non-Contractible Quality

When contracting with an agent who is a worker of non-contractible quality, a principal considers mechanisms with an informed third party, a manager. To induce the manager to report worker quality truthfully, the principal devises the first-order alignment, an aligned contract based on first-order condition optimality. We show that the mechanism contracting simultaneously with the manager and the agent can dominate the optimal "selling the project" mechanism. This dominance, combined with the manager's information acquisition costs, results in three optimal organizational structures: simultaneous contracting, ex ante contracting, or partial revelation.