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Relational Delegation

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  • Alonso, Ricardo
  • Matouschek, Niko

Abstract

We explore the optimal delegation of decision rights by a principal to a better informed but biased agent. In an infinitely repeated game a long-lived principal faces a series of short-lived agents. Every period they play a cheap talk game a la Crawford and Sobel (1982) with constant bias, quadratic loss functions and general distributions of the state of the world. We characterize the optimal delegation schemes for all discount rates and show that they resemble organizational arrangements that are commonly observed, including centralization and threshold delegation. For small biases threshold delegation is optimal for almost all distributions. Outsourcing can only be optimal if the principal is sufficiently impatient.

Suggested Citation

  • Alonso, Ricardo & Matouschek, Niko, 2005. "Relational Delegation," CEPR Discussion Papers 4870, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4870
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    References listed on IDEAS

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    1. George Baker & Robert Gibbons & Kevin J. Murphy, 2002. "Relational Contracts and the Theory of the Firm," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 39-84.
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    More about this item

    Keywords

    cheap talk; delegation; relational contract;

    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
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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