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Delegation and nonmonetary incentives

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  • Ambrus, Attila
  • Egorov, Georgy

Abstract

In many contracting settings, actions costly to one party but with no direct benefits to the other (money-burning) may be part of the explicit or implicit contract. A leading example is bureaucratic procedures in an employer–employee relationship. We study a model of delegation with an informed agent, where the principal may impose money-burning on the agent as a function of the agent's choice of action, and show that money-burning may be part of the optimal contract. This result holds even if action-contingent monetary transfers are possible, as long as transfers from the principal to the agent are bounded from below (as in limited liability or minimal wage requirements). In fact, the optimal contract can involve a combination of both efficient monetary incentives and inefficient nonmonetary incentives through money burning. Our model delivers some results novel to the delegation literature. First, money-burning is more likely if the principal is more “sensitive” to the choice of action than the agent. This is consistent with the perception that there is more bureaucratization in large organizations. Second, money-burning is more likely if the agent's limited liability constraint is tighter relative to his participation constraint. This implies that a higher minimum wage distorts employment contracts towards using socially wasteful nonmonetary incentives, leading to a Pareto inferior outcome as the agent is still held down to his reservation value through increased money burning.

Suggested Citation

  • Ambrus, Attila & Egorov, Georgy, 2017. "Delegation and nonmonetary incentives," Journal of Economic Theory, Elsevier, vol. 171(C), pages 101-135.
  • Handle: RePEc:eee:jetheo:v:171:y:2017:i:c:p:101-135
    DOI: 10.1016/j.jet.2017.06.002
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    2. Kolotilin, Anton & Li, Hongyi, 2021. "Relational communication," Theoretical Economics, Econometric Society, vol. 16(4), November.
    3. Amador, Manuel & Bagwell, Kyle, 2020. "Money burning in the theory of delegation," Games and Economic Behavior, Elsevier, vol. 121(C), pages 382-412.
    4. Laureti, Carolina & Szafarz, Ariane, 2023. "Banking regulation and costless commitment contracts for time-inconsistent agents," Economic Modelling, Elsevier, vol. 129(C).
    5. Raghul S Venkatesh, 2018. "Communication and Commitment with Constraints," AMSE Working Papers 1856, Aix-Marseille School of Economics, France, revised Jul 2019.
    6. Mehdi Ayouni & Franck Bien & Thomas Lanzi, 2022. "The failure of the delegation principle in a principal-agent model with transfers," Working Papers of BETA 2022-14, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    7. Alex Frankel, 2021. "Selecting Applicants," Econometrica, Econometric Society, vol. 89(2), pages 615-645, March.
    8. Galperti, Simone, 2019. "A theory of personal budgeting," Theoretical Economics, Econometric Society, vol. 14(1), January.
    9. Lipnowski, Elliot & Ramos, João, 2020. "Repeated delegation," Journal of Economic Theory, Elsevier, vol. 188(C).
    10. Eduardo Engel & Ronald Fischer & Alexander Galetovic & Jennifer Soto, 2019. "Financing PPP Projects with PVR Contracts: Theory and Evidence from the UK and Chile," Documentos de Trabajo 347, Centro de Economía Aplicada, Universidad de Chile.
    11. Marina Halac & Pierre Yared, 2022. "Fiscal Rules and Discretion Under Limited Enforcement," Econometrica, Econometric Society, vol. 90(5), pages 2093-2127, September.
    12. Manuel Amador & Kyle Bagwell & Alex Frankel, 2018. "A note on interval delegation," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 6(2), pages 239-249, October.
    13. Navin Kartik & Andreas Kleiner & Richard Van Weelden, 2021. "Delegation in Veto Bargaining," American Economic Review, American Economic Association, vol. 111(12), pages 4046-4087, December.
    14. Elias Tsakas & Nikolas Tsakas & Dimitrios Xefteris, 2021. "Resisting persuasion," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 72(3), pages 723-742, October.
    15. Maxim Senkov & Toygar T. Kerman, 2024. "Changing Simplistic Worldviews," CERGE-EI Working Papers wp773, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    16. Arve, Malin & Honryo, Takakazu, 2022. "Wasteful procedures?," Journal of Economics and Business, Elsevier, vol. 122(C).
    17. Noam Tanner, 2018. "Optimal Delegation Under Unknown Bias: The Role of Concavity," Supervisory Research and Analysis Working Papers RPA 18-1, Federal Reserve Bank of Boston.
    18. Raghul S Venkatesh, 2019. "Communication and Commitment with Constraints in International Alliances," Working Papers halshs-01962239, HAL.
    19. Andreas Kleiner, 2022. "Optimal Delegation in a Multidimensional World," Papers 2208.11835, arXiv.org.
    20. Mehdi Ayouni & Franck Bien & Thomas Lanzi, 2023. "The failure of the delegation principle in a principal-agent model with transfers," Economics Bulletin, AccessEcon, vol. 43(1), pages 518-525.
    21. Maxim Senkov & Toygar T. Kerman, 2024. "Changing Simplistic Worldviews," Papers 2401.02867, arXiv.org.
    22. Juan Escobar & Qiaoxi Zhang, 2019. "Delegating Learning," Documentos de Trabajo 348, Centro de Economía Aplicada, Universidad de Chile.
    23. Gregorio Curello & Ludvig Sinander, 2020. "Screening for breakthroughs," Papers 2011.10090, arXiv.org, revised Feb 2024.

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    More about this item

    Keywords

    Delegation; Organizational procedures; Money burning;
    All these keywords.

    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
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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