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Optimal Delegation with a Finite Number of States

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  • Vincent Anesi

    (University of Nottingham)

  • Daniel J. Seidmann

    (University of Nottingham)

Abstract

This paper contributes to the literature on optimal delegation, dating back to Holmstrom's (1984) seminal work. In contrast to models in the Holmstrom tradition, we assume that the set of states is finite. We provide a full characterization of the class of optimal delegation sets under this assumption, and show that they have a different structure from that in the continuous-state model. As the number of states tends to infinity, however, every optimal delegation set converges to that of Holmstrom (1984). We also show that, for intermediate bias, the Ally Principal fails for small changes in bias, the Uncertainty Principle may fail, and the principal prefers to appoint an amateur agent.

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Bibliographic Info

Paper provided by The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham in its series Discussion Papers with number 2009-20.

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Date of creation: Nov 2009
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Handle: RePEc:cdx:dpaper:2009-20

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Keywords: Optimal delegation; finite states; Ally Principle; Uncertainty Principle; expertise;

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References

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  1. Vijay Krishna & John Morgan, 2005. "Contracting for Information under Imperfect Commitment," Microeconomics 0504006, EconWPA.
  2. Georgy Egorov & Konstantin Sonin, 2004. "Dictators and Their Viziers: Agency Problems in Dictatorships," Working Papers w0043, Center for Economic and Financial Research (CEFIR).
  3. Vincent Anesi & Daniel J. Seidmann, 2011. "Optimal Delegation with a Finite Number of States," Discussion Papers 2011-04, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
  4. Manuel Amador & Ivan Werning & George-Marios Angeletos, 2003. "Commitment Vs. Flexibility," NBER Working Papers 10151, National Bureau of Economic Research, Inc.
  5. Kovác, Eugen & Mylovanov, Tymofiy, 2009. "Stochastic mechanisms in settings without monetary transfers: The regular case," Journal of Economic Theory, Elsevier, vol. 144(4), pages 1373-1395, July.
  6. Craig Volden, 2002. "Delegating Power to Bureaucracies: Evidence from the States," Journal of Law, Economics and Organization, Oxford University Press, vol. 18(1), pages 187-220, April.
  7. Koessler, Frédéric & Martimort, David, 2012. "Optimal delegation with multi-dimensional decisions," Journal of Economic Theory, Elsevier, vol. 147(5), pages 1850-1881.
  8. Sanford C. Gordon, 2007. "Directing Retribution: On the Political Control of Lower Court Judges," Journal of Law, Economics and Organization, Oxford University Press, vol. 23(2), pages 386-420, June.
  9. Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, vol. 95(380a), pages 138-47, Supplemen.
  10. Nahum D. Melumad & Toshiyuki Shibano, 1991. "Communication in Settings with No. Transfers," RAND Journal of Economics, The RAND Corporation, vol. 22(2), pages 173-198, Summer.
  11. Callander, Steven, 2008. "A Theory of Policy Expertise," International Quarterly Journal of Political Science, now publishers, vol. 3(2), pages 123-140, July.
  12. Goltsman, Maria & Hörner, Johannes & Pavlov, Gregory & Squintani, Francesco, 2009. "Mediation, arbitration and negotiation," Journal of Economic Theory, Elsevier, vol. 144(4), pages 1397-1420, July.
  13. Ivanov, Maxim, 2010. "Informational control and organizational design," Journal of Economic Theory, Elsevier, vol. 145(2), pages 721-751, March.
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Cited by:
  1. Vincent Anesi & Daniel J. Seidmann, 2009. "Optimal Delegation with a Finite Number of States," Discussion Papers 2009-20, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.

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