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Optimal limited authority for principal

Author

Listed:
  • Kolotilin, Anton
  • Li, Hao
  • Li, Wei

Abstract

This article studies a principal-agent problem where the only commitment for the uninformed principal is to restrict the set of decisions she makes following a report by the informed agent. We show that an ex ante optimal equilibrium for the principal corresponds to a finite partition of the state space, and each retained decision is ex post suboptimal for the principal, biased toward the agentʼs preference. Generally an optimal equilibrium does not maximize the number of decisions the principal can credibly retain. Compared to no commitment, limited authority improves the quality of communication from the agent. As a result, it can give the principal a higher expected payoff than delegating the decision to the agent.

Suggested Citation

  • Kolotilin, Anton & Li, Hao & Li, Wei, 2013. "Optimal limited authority for principal," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2344-2382.
  • Handle: RePEc:eee:jetheo:v:148:y:2013:i:6:p:2344-2382
    DOI: 10.1016/j.jet.2013.09.014
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Igor Letina & Shuo Liu & Nick Netzer, 2017. "Delegating performance evaluation," ECON - Working Papers 266, Department of Economics - University of Zurich, revised Mar 2018.
    2. Eric Schmidbauer & Dmitry Lubensky, 2016. "Equilibrium Informativeness in Veto-Based Delegation," Working Papers 2016-03, University of Central Florida, Department of Economics.
    3. Liang, Pinghan, 2013. "Optimal delegation via a strategic intermediary," Games and Economic Behavior, Elsevier, vol. 82(C), pages 15-30.
    4. repec:spr:reecde:v:21:y:2017:i:4:d:10.1007_s10058-017-0206-8 is not listed on IDEAS
    5. Krähmer, Daniel & Kováč, Eugen, 2016. "Optimal sequential delegation," Journal of Economic Theory, Elsevier, vol. 163(C), pages 849-888.
    6. Garfagnini, Umberto & Ottaviani, Marco & Sørensen, Peter Norman, 2014. "Accept or reject? An organizational perspective," International Journal of Industrial Organization, Elsevier, vol. 34(C), pages 66-74.

    More about this item

    Keywords

    Limited commitment; Cheap talk; Delegation;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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