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Contracting for Information under Imperfect Commitment

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  • Krishna, Vijay
  • Morgan, John

Abstract

Organizational theory suggests that authority should lie in the hands of those with information, yet the power to transfer authority is rarely absolute in practice. We investigate the validity and application of this advice in a model of optimal contracting between an uninformed principal and informed agent where the principal's commitment power is imperfect. We show that while full alignment of interests combined with delegation of authority is feasible, it is never optimal. The optimal contract is "bang-bang"---in one region of the state space, full alignment takes place, in the other, no alignment takes place. We then compare these contracts to those in which the principal has full commitment power as well as to several "informal" institutional arrangements.

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Paper provided by Competition Policy Center, Institute for Business and Economic Research, UC Berkeley in its series Competition Policy Center, Working Paper Series with number qt4010c6w9.

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Date of creation: 01 Nov 2004
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Handle: RePEc:cdl:compol:qt4010c6w9

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Keywords: Imperfect commitment; optimal contracting; delegation;

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  1. Dessein, Wouter, 2002. "Authority and Communication in Organizations," Review of Economic Studies, Wiley Blackwell, vol. 69(4), pages 811-38, October.
  2. Philippe Aghion & Jean Tirole, 1994. "Normal and Real Authority in Organizations," Working papers 94-13, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February.
  4. Gilligan, Thomas W & Krehbiel, Keith, 1987. "Collective Decisionmaking and Standing Committees: An Informational Rationale for Restrictive Amendment Procedures," Journal of Law, Economics and Organization, Oxford University Press, vol. 3(2), pages 287-335, Fall.
  5. Crawford, Vincent P & Sobel, Joel, 1982. "Strategic Information Transmission," Econometrica, Econometric Society, vol. 50(6), pages 1431-51, November.
  6. Bester, Helmut & Strausz, Roland, 2001. "Contracting with Imperfect Commitment and the Revelation Principle: The Single Agent Case," Econometrica, Econometric Society, vol. 69(4), pages 1077-98, July.
  7. Prendergast, Canice, 1993. "A Theory of "Yes Men."," American Economic Review, American Economic Association, vol. 83(4), pages 757-70, September.
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