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The optimality of (stochastic) veto delegation

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  • Xiaoxiao Hu
  • Haoran Lei

Abstract

We analyze the optimal delegation problem between a principal and an agent, assuming that the latter has state-independent preferences. We demonstrate that if the principal is more risk-averse than the agent toward non-status quo options, an optimal mechanism is a {\em veto mechanism}. In a veto mechanism, the principal uses veto (i.e., maintaining the status quo) to balance the agent's incentives and does not randomize among non-status quo options. We characterize the optimal veto mechanism in a one-dimensional setting. In the solution, the principal uses veto only when the state surpasses a critical threshold.

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  • Xiaoxiao Hu & Haoran Lei, 2022. "The optimality of (stochastic) veto delegation," Papers 2208.14829, arXiv.org, revised Feb 2024.
    • Handle: RePEc:arx:papers:2208.14829
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