This paper studies the costs and benefits of delegating decisions to superiorly informed agents relative to the use of rigid, non discretionary contracts. Delegation grants some flexibility in the choice of the action by the agent, but also requires the use of an appropriate incentive contract so as to realign his interests with those of the principal. The parties' understanding of the possible circumstances in which actions will have to be chosen and their attitude towards risk and uncertainty play then an important role in determining the costs of delegation. The main focus of the paper lies indeed in the analysis of these costs and the consequences for whether or not delegation is optimal. We determine and characterize the properties of the optimal flexible contract both when the parties have sharp probabilistic beliefs over the possible events in which the agent will have to act and when they only have a set of such beliefs. We show that the higher the agent's degree of risk aversion, the higher the agency costs for delegation and hence the less profitable is a flexible contract versus a rigid one. The agent's imprecision aversion in the case of multiple priors introduces another, additional agency costs; it again implies that the higher the degree of imprecision aversion the less profitable flexible contracts versus rigid ones. Even though, with multiple priors, the contract may be designed in such a way that principal and agent end up using 'different beliefs' and hence engage in speculative trade, this is never optimal, in contrast with the case where the parties have sharp heterogeneous beliefs.
|Date of creation:||2009|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.carloalberto.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Peter Klibanoff & Massimo Marinacci & Sujoy Mukerji, 2002.
"A smooth model of decision making under ambiguity,"
ICER Working Papers - Applied Mathematics Series
11-2003, ICER - International Centre for Economic Research, revised Apr 2003.
- Wouter Dessein, 2002.
"Authority and Communication in Organizations,"
Review of Economic Studies,
Oxford University Press, vol. 69(4), pages 811-838.
- Wouter Dessein, 2000. "Authority and Communication in Organizations," Econometric Society World Congress 2000 Contributed Papers 1747, Econometric Society.
- Thibault Gajdos & Takashi Hayashi & Jean-Marc Tallon & Jean-Christophe Vergnaud, 2006.
"Attitude toward imprecise information,"
Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers)
- Thibault Gajdos & Takashi Hayashi & Jean-Marc Tallon & Jean-Christophe Vergnaud, 2006. "Attitude toward imprecise information," Cahiers de la Maison des Sciences Economiques v06081, Université Panthéon-Sorbonne (Paris 1).
- Thibault Gajdos & Takashi Hayashi & Jean-Marc Tallon & Jean-Christophe Vergnaud, 2008. "Attitude toward imprecise information," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00451982, HAL.
- Jewitt, Ian, 1987. "Risk Aversion and the Choice between Risky Prospects: The Preservation of Comparative Statics Results," Review of Economic Studies, Wiley Blackwell, vol. 54(1), pages 73-85, January.
- Aghion, Philippe & Tirole, Jean, 1997.
"Formal and Real Authority in Organizations,"
4554125, Harvard University Department of Economics.
- Philippe Aghion & Jean Tirole, 1994. "Normal and Real Authority in Organizations," Working papers 94-13, Massachusetts Institute of Technology (MIT), Department of Economics.
- Philippe Aghion & Jean Tirole, 1994. "Formal and Real Authority in Organizations," Working papers 95-8, Massachusetts Institute of Technology (MIT), Department of Economics.
- Aghion, Philippe & Tirole, Jean, 1994. "Formal and Real Authority in Organizations," IDEI Working Papers 37, Institut d'Économie Industrielle (IDEI), Toulouse.
- Strzalecki, Tomasz & Werner, Jan, 2011.
"Efficient Allocations under Ambiguity,"
11352637, Harvard University Department of Economics.
- Alonso, Ricardo & Matouschek, Niko, 2005.
CEPR Discussion Papers
5289, C.E.P.R. Discussion Papers.
- Bruno Jullien & Bernard Salanié & François Salanié, 1998.
"Should More Risk-Averse Agents Exert More Effort,"
98-12, Centre de Recherche en Economie et Statistique.
- Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
- Kfir Eliaz & Ran Spiegler, 2007.
"A Mechanism-Design Approach to Speculative Trade,"
Econometric Society, vol. 75(3), pages 875-884, 05.
- Eliaz, Kfir & Spiegler, Ran, 2005. "A Mechanism-Design Approach to Speculative Trade," CEPR Discussion Papers 5434, C.E.P.R. Discussion Papers.
- Kfir Eliaz & Rani Spiegler, 2005. "A Mechanism-Design Approach to Speculative Trade," Levine's Bibliography 784828000000000429, UCLA Department of Economics.
- Mukerji, S., 1997.
"Ambiguity aversion and incompleteness of contractual form,"
Discussion Paper Series In Economics And Econometrics
9715, Economics Division, School of Social Sciences, University of Southampton.
- Mukerji, Sujoy, 1998. "Ambiguity Aversion and Incompleteness of Contractual Form," American Economic Review, American Economic Association, vol. 88(5), pages 1207-31, December.
- Billot, A. & Chateauneuf, A. & Gilboa, I. & Tallon, J.-M., 1998.
"Sharing Beliefs: Between Agreeing and Disagreeing,"
Papiers d'Economie MathÃ©matique et Applications
98.30, UniversitÃ© PanthÃ©on-Sorbonne (Paris 1).
- Antoine Billot & Alain Chateauneuf & Itzhak Gilboa & Jean-Marc Tallon, 2000. "Sharing beliefs: between agreeing and disagreeing," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00174553, HAL.
- Armstrong, Mark & Vickers, John, 2008.
"A model of delegated project choice,"
8963, University Library of Munich, Germany.
- Oliver Hart & John Moore, 2008.
"Contracts as Reference Points,"
The Quarterly Journal of Economics,
MIT Press, vol. 123(1), pages 1-48, 02.
- Schmeidler, David, 1989.
"Subjective Probability and Expected Utility without Additivity,"
Econometric Society, vol. 57(3), pages 571-87, May.
- David Schmeidler, 1989. "Subjective Probability and Expected Utility without Additivity," Levine's Working Paper Archive 7662, David K. Levine.
- Canice Prendergast, 2002. "The Tenuous Trade-off between Risk and Incentives," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1071-1102, October.
- Ghirardato, Paolo & Maccheroni, Fabio & Marinacci, Massimo, 2004. "Differentiating ambiguity and ambiguity attitude," Journal of Economic Theory, Elsevier, vol. 118(2), pages 133-173, October.
When requesting a correction, please mention this item's handle: RePEc:cca:wpaper:128. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Giovanni Bert)
If references are entirely missing, you can add them using this form.