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A dynamic optimization approach to delegation with an application to volunteer contracts

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  • Saran, Rene

Abstract

We present a novel and tractable method that is widely applicable to general delegation problems. Every delegation set is equivalent to an incentive feasible mechanism. We characterize mechanisms with at most finitely many points of discontinuity and prove that the corresponding constrained problem is equivalent to a discrete-time, finite-horizon, dynamic optimization problem. This transformation makes the problem tractable: The dynamic problem is essentially a shortest-path problem that is amenable to different solution methods. By analyzing the dynamic problem, we show that restricting to mechanisms with at most finitely many points of discontinuity broadly entails no loss to the principal and identify a novel sufficient condition for such mechanisms to be optimal. We also provide a numerical method to find an approximately optimal mechanism. Lastly, we illustrate the results in a new delegation model of volunteer contracts.

Suggested Citation

  • Saran, Rene, 2026. "A dynamic optimization approach to delegation with an application to volunteer contracts," Games and Economic Behavior, Elsevier, vol. 155(C), pages 27-54.
    • Handle: RePEc:eee:gamebe:v:155:y:2026:i:c:p:27-54
    DOI: 10.1016/j.geb.2025.10.002
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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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