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Relational Delegation

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  • Alonso, Ricardo
  • Matouschek, Niko

Abstract

We explore the optimal delegation of decision rights by a principal to a better informed but biased agent. In an infinitely repeated game a long-lived principal faces a series of short-lived agents. Every period they play a cheap talk game a la Crawford and Sobel (1982) with constant bias, quadratic loss functions and general distributions of the state of the world. We characterize the optimal delegation schemes for all discount rates and show that they resemble organizational arrangements that are commonly observed, including centralization and threshold delegation. For small biases threshold delegation is optimal for almost all distributions. Outsourcing can only be optimal if the principal is sufficiently impatient.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4870.

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Date of creation: Jan 2005
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Handle: RePEc:cpr:ceprdp:4870

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Keywords: cheap talk; delegation; relational contract;

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References

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  1. Jonathan Levin, 2000. "Relational Incentive Contracts," Working Papers 01002, Stanford University, Department of Economics.
  2. Wouter Dessein, 2002. "Authority and Communication in Organizations," Review of Economic Studies, Oxford University Press, vol. 69(4), pages 811-838.
  3. Anthony M. Marino & John G. Matsusaka, 2005. "Decision Processes, Agency Problems, and Information: An Economic Analysis of Capital Budgeting Procedures," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 301-325.
  4. V. Crawford & J. Sobel, 2010. "Strategic Information Transmission," Levine's Working Paper Archive 544, David K. Levine.
  5. Ricardo Alonso & Niko Matouschek, 2008. "Optimal Delegation," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 259-293.
  6. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
  7. George Baker & Robert Gibbons & Kevin J. Murphy, 1993. "Subjective Performance Measures in Optimal Incentive Contracts," NBER Working Papers 4480, National Bureau of Economic Research, Inc.
  8. George Baker & Robert Gibbons & Kevin J. Murphy, 2002. "Relational Contracts And The Theory Of The Firm," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 39-84, February.
  9. Vijay Krishna & John Morgan, 2005. "Contracting for Information under Imperfect Commitment," Microeconomics 0504006, EconWPA.
  10. Harris, Milton & Raviv, Artur, 1996. " The Capital Budgeting Process: Incentives and Information," Journal of Finance, American Finance Association, vol. 51(4), pages 1139-74, September.
  11. 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.
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Citations

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Cited by:
  1. Ricardo Alonso & Niko Matouschek, 2008. "Optimal Delegation," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 259-293.
  2. Liang, Pinghan, 2013. "Optimal delegation via a strategic intermediary," MPRA Paper 45271, University Library of Munich, Germany.
  3. Alonso, Ricardo & Brocas, Isabelle & Carrillo, Juan D, 2011. "Resource Allocation in the Brain," CEPR Discussion Papers 8408, C.E.P.R. Discussion Papers.
  4. Junichiro Ishida, 2012. "Promotion without Commitment: Signaling, Time Inconsistency and Decentralization of the Firm," ISER Discussion Paper 0843, Institute of Social and Economic Research, Osaka University.
  5. Kolotilin, Anton & Li, Hao & Li, Wei, 2013. "Optimal limited authority for principal," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2344-2382.
  6. Armstrong, Mark & Vickers, John, 2008. "A model of delegated project choice," MPRA Paper 8963, University Library of Munich, Germany.
  7. Liang, Pinghan, 2013. "Optimal delegation via a strategic intermediary," Games and Economic Behavior, Elsevier, vol. 82(C), pages 15-30.
  8. Sylvain Chassang, 2010. "Building Routines: Learning, Cooperation, and the Dynamics of Incomplete Relational Contracts," American Economic Review, American Economic Association, vol. 100(1), pages 448-65, March.
  9. Irene Valsecchi, 2013. "The expert problem: a survey," Economics of Governance, Springer, vol. 14(4), pages 303-331, November.
  10. Florence LACHET-TOUYA, 2013. "The Assignment of a CSR Action Choice," Working Papers 2012-2013_10, CATT - UPPA - Université de Pau et des Pays de l'Adour, revised Jul 2013.
  11. McGee, Andrew & Yang, Huanxing, 2013. "Cheap talk with two senders and complementary information," Games and Economic Behavior, Elsevier, vol. 79(C), pages 181-191.
  12. Baldenius, Tim & Melumad, Nahum & Meng, Xiaojing, 2014. "Board composition and CEO power," Journal of Financial Economics, Elsevier, vol. 112(1), pages 53-68.
  13. Miriam Schütte & Philipp C. Wichardt, 2012. "Delegation in Long-Term Relationships," SOEPpapers on Multidisciplinary Panel Data Research 480, DIW Berlin, The German Socio-Economic Panel (SOEP).
  14. Andrey Malenko, 2011. "Optimal Design of Internal Capital Markets," 2011 Meeting Papers 442, Society for Economic Dynamics.
  15. Miriam Schütte & Philipp Christoph Wichardt, 2013. "Delegation and Interim Performance Evaluation," CESifo Working Paper Series 4193, CESifo Group Munich.

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