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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 studies delegation without monetary transfers when the number of possible states is small, and therefore finite. To do so, we fully characterize the class of optimal delegation sets in the finite-state version of Holmstrom’s (1984) seminal model and analyze their properties. Our finite state assumption entails the following results: (i) the agent never takes her ideal decision, and takes a decision strictly between her and the principal’s ideal (thus compromising with the latter) in low enough states; (ii) the agent takes the same decision in high enough states, and is indifferent between the decision she takes and the next highest decision in every other state; (iii) the agent may be induced to take decisions outside the support of the principal’s ideal decisions; (iv) marginal increases in the agent’s bias do not (generically) cause optimal delegation sets to shrink, and may increase the variance of the decision taken by the agent. We also show that the principal and the agent may both be better off if the latter cannot distinguish between some states.

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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 2011-04.

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Date of creation: Apr 2011
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Handle: RePEc:cdx:dpaper:2011-04

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

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  1. Georgy Egorov & Konstantin Sonin, 2005. "Dictators and Their Viziers: Agency Problems in Dictatorships," Economics Working Papers 0053, Institute for Advanced Study, School of Social Science.
  2. 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.
  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. Ivanov, Maxim, 2010. "Informational control and organizational design," Journal of Economic Theory, Elsevier, vol. 145(2), pages 721-751, March.
  5. Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, vol. 95(380a), pages 138-47, Supplemen.
  6. Koessler, Frédéric & Martimort, David, 2012. "Optimal delegation with multi-dimensional decisions," Journal of Economic Theory, Elsevier, vol. 147(5), pages 1850-1881.
  7. Manuel Amador & Ivan Werning & George-Marios Angeletos, 2003. "Commitment Vs. Flexibility," NBER Working Papers 10151, National Bureau of Economic Research, Inc.
  8. Krishna, Vijay & Morgan, John, 2004. "Contracting for Information under Imperfect Commitment," Competition Policy Center, Working Paper Series qt4010c6w9, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
  9. 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.
  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. 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.
  13. 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.
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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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