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Delegation and Information Revelation

  • Axel Gautier
  • Dimitri Paolini

This paper addresses the question of delegation in a partial contracting set-up, where only the control over actions is contractible. We consider an organization that should take two decisions, affected by a common state of the world parameter only known by the agent. We show that, if the principal gives up the control over the first decision, to the better informed agent, the decision of the agent signals his private information to the principal. The revelation of information, associated with delegation, is valuable for the principal if she retains control over the second decision. Hence, this paper provides a new rational for partial delegation: a transfer of control to the better-informed party can be used by the supervisor to elicit the agent's private information. We establish this result by using the properties of signalling game. Finally, we show that, even if there are loss of control associated with delegation, the benefits of information revelation outweighs these costs and delegation could dominate centralization of all decisions by the principal, even in the case where she uses messages from the agent to acquire information; because those messages could be noisy.

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File URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonedp/bgse18_2002.pdf
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Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse18_2002.

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Length: 32
Date of creation: Jul 2002
Date of revision:
Handle: RePEc:bon:bonedp:bgse18_2002
Contact details of provider: Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de

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  1. Patrick Legros, 1993. "Information revelation and repeated delegation," ULB Institutional Repository 2013/7038, ULB -- Universite Libre de Bruxelles.
  2. Myerson, Roger B., 1982. "Optimal coordination mechanisms in generalized principal-agent problems," Journal of Mathematical Economics, Elsevier, vol. 10(1), pages 67-81, June.
  3. repec:ner:ucllon:http://discovery.ucl.ac.uk/17678/ is not listed on IDEAS
  4. Cho, In-Koo & Kreps, David M, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 179-221, May.
  5. Oliver Hart & John Moore, 1985. "Incomplete Contracts and Renegotiation," Working papers 367, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Harris, Milton & Raviv, Artur, 1998. "Capital budgeting and delegation," Journal of Financial Economics, Elsevier, vol. 50(3), pages 259-289, December.
  7. Armstrong, M., 1994. "Delegation and discretion," Discussion Paper Series In Economics And Econometrics 9421, Economics Division, School of Social Sciences, University of Southampton.
  8. John G. Riley, 1976. "Informational Equilibrium," UCLA Economics Working Papers 071, UCLA Department of Economics.
  9. Philippe Aghion & Jean Tirole, 1994. "Formal and Real Authority in Organizations," Working papers 95-8, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Jean-Jacques Laffont & Jean Tirole, 1985. "The Dynamics of Incentive Contracts," Working papers 397, Massachusetts Institute of Technology (MIT), Department of Economics.
  11. Martimort, David, 1997. " A Theory of Bureaucratization Based on Reciprocity and Collusive Behavior," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(4), pages 555-79, December.
  12. Melumad, Nahum & Mookherjee, Dilip & Reichelstein, Stefan, 1992. "A theory of responsibility centers," Journal of Accounting and Economics, Elsevier, vol. 15(4), pages 445-484, December.
  13. 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.
  14. Jean Tirole, 1999. "Incomplete Contracts: Where Do We Stand?," Econometrica, Econometric Society, vol. 67(4), pages 741-782, July.
  15. V. Crawford & J. Sobel, 2010. "Strategic Information Transmission," Levine's Working Paper Archive 544, David K. Levine.
  16. Freixas, Xavier & Guesnerie, Roger & Tirole, Jean, 1985. "Planning under Incomplete Information and the Ratchet Effect," Review of Economic Studies, Wiley Blackwell, vol. 52(2), pages 173-91, April.
  17. repec:cep:stitep:/1996/303 is not listed on IDEAS
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