Optimal delegation via a strategic intermediary
AbstractThis paper studies the optimal design of delegation rule in a three-tier principal–intermediary–agent hierarchy. In this hierarchy, monetary transfer is not feasible, delegation is made sequentially, and all players are strategic. We characterize the optimal delegation mechanism. It is shown that the single-interval delegation a la Holmstrom is optimal only when the intermediary is moderately biased. Otherwise, as responses to the distortion caused by a biased intermediary, the optimal delegation set may involve a hole. Thus, multi-interval delegation set would arise when subordinates have opposing biases. This result sheds some light on policy threshold effects: “slight” changes in the underlying state cause a jump in the policy responses.
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Bibliographic InfoArticle provided by Elsevier in its journal Games and Economic Behavior.
Volume (Year): 82 (2013)
Issue (Month): C ()
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Web page: http://www.elsevier.com/locate/inca/622836
Delegation; Intermediary; Hierarchies;
Find related papers by JEL classification:
- D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
- D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
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