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Relational delegation

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  • Ricardo Alonso
  • Niko Matouschek

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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Suggested Citation

  • Ricardo Alonso & Niko Matouschek, 2007. "Relational delegation," RAND Journal of Economics, RAND Corporation, vol. 38(4), pages 1070-1089, December.
  • Handle: RePEc:bla:randje:v:38:y:2007:i:4:p:1070-1089
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    File URL: http://hdl.handle.net/10.1111/j.0741-6261.2007.00126.x
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    References listed on IDEAS

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    6. 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, pages 301-325.
    7. Vijay Krishna & John Morgan, 2008. "Contracting for information under imperfect commitment," RAND Journal of Economics, RAND Corporation, pages 905-925.
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    Citations

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    Cited by:

    1. Sylvain Chassang, 2010. "Building Routines: Learning, Cooperation, and the Dynamics of Incomplete Relational Contracts," American Economic Review, American Economic Association, pages 448-465.
    2. repec:eee:jetheo:v:171:y:2017:i:c:p:101-135 is not listed on IDEAS
    3. Irene Valsecchi, 2013. "The expert problem: a survey," Economics of Governance, Springer, pages 303-331.
    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. Liang, Pinghan, 2013. "Optimal delegation via a strategic intermediary," Games and Economic Behavior, Elsevier, pages 15-30.
    7. 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.
    8. 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.
    9. Baldenius, Tim & Melumad, Nahum & Meng, Xiaojing, 2014. "Board composition and CEO power," Journal of Financial Economics, Elsevier, vol. 112(1), pages 53-68.
    10. Miriam Schütte & Philipp Christoph Wichardt, 2013. "Delegation and Interim Performance Evaluation," CESifo Working Paper Series 4193, CESifo Group Munich.
    11. repec:spr:reecde:v:21:y:2017:i:4:d:10.1007_s10058-017-0206-8 is not listed on IDEAS
    12. Andrey Malenko, 2011. "Optimal Design of Internal Capital Markets," 2011 Meeting Papers 442, Society for Economic Dynamics.
    13. Jin Li & Niko Matouschek & Michael Powell, 2017. "Power Dynamics in Organizations," American Economic Journal: Microeconomics, American Economic Association, pages 217-241.
    14. Soetevent, Adriaan R. & Bruzikas, Tadas, 2016. "Risk and Loss Aversion, Price Uncertainty and the Implications for Consumer Search," Research Report 16015-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    15. 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).
    16. Mark Armstrong & John Vickers, 2010. "A Model of Delegated Project Choice," Econometrica, Econometric Society, vol. 78(1), pages 213-244, January.
    17. Takashi Shimizu, 2016. "Cheap Talk with an Exit Option: A Model of Exit and Voice," Discussion Papers 1607, Graduate School of Economics, Kobe University.
    18. Ricardo Alonso & Isabelle Brocas & Juan D. Carrillo, 2014. "Resource Allocation in the Brain," Review of Economic Studies, Oxford University Press, vol. 81(2), pages 501-534.
    19. Ricardo Alonso & Niko Matouschek, 2008. "Optimal Delegation," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 259-293.
    20. Yang, Fiona X. & Zhang, Rachel Q. & Zhu, Kaijie, 2017. "Should purchasing activities be outsourced along with production?," European Journal of Operational Research, Elsevier, vol. 257(2), pages 468-482.
    21. repec:spr:jogath:v:46:y:2017:i:4:d:10.1007_s00182-017-0571-0 is not listed on IDEAS
    22. Alonso, Ricardo & Dessein, Wouter & Matouschek, Niko, 2008. "When does coordination require centralization?," LSE Research Online Documents on Economics 58664, London School of Economics and Political Science, LSE Library.
    23. McGee, Andrew & Yang, Huanxing, 2013. "Cheap talk with two senders and complementary information," Games and Economic Behavior, Elsevier, vol. 79(C), pages 181-191.
    24. Boleslavsky, Raphael & Lewis, Tracy R., 2016. "Evolving influence: Mitigating extreme conflicts of interest in advisory relationships," Games and Economic Behavior, Elsevier, vol. 98(C), pages 110-134.
    25. Florence 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.

    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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