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Strategic Delegation by Unobservable Incentive Contracts

  • Kockesen, L.
  • Ok, E.

Many strategic interactions in the real world take place among delegates empowered to act on behalf of others. Although there may be a multitude of reasons why delegation arises in reality, one intriguing possibility is that it yields a strategic advantage to the delegating party. In the case where only one party has the option to delegate, we analyse the possibility that strategic delegation arises as an equilibrium outcome under completely unobservable incentive contracts within the class of two-person extensive form games. We show that delegation may arise solely due to strategic reasons in quite general economic environments even under unobservable contracts. Furthermore, under some reasonable restrictions on out-of-equilibrium beliefs and actions of the outside party, strategic delegation is shown to be the only equilibrium outcome. Copyright 2004, Wiley-Blackwell.

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Paper provided by C.V. Starr Center for Applied Economics, New York University in its series Working Papers with number 99-11.

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Length: 43 pages
Date of creation: 1999
Date of revision:
Handle: RePEc:cvs:starer:99-11
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  1. Jensen, Henrik, 1997. "Credibility of Optimal Monetary Delegation," American Economic Review, American Economic Association, vol. 87(5), pages 911-20, December.
  2. Kockesen, L. & Ok, E., 1999. "Strategic Delegation by Unobservable Incentive Contracts," Working Papers 99-11, C.V. Starr Center for Applied Economics, New York University.
  3. McLennan, Andrew, 1985. "Justifiable Beliefs in Sequential Equilibrium," Econometrica, Econometric Society, vol. 53(4), pages 889-904, July.
  4. Mathias Dewatripont, 1988. "Commitment through renegotiation-proof contacts with third parties," ULB Institutional Repository 2013/9569, ULB -- Universite Libre de Bruxelles.
  5. Caillaud, Bernard & Jullien, B & Picard, P, 1995. "Competing Vertical Structures: Precommitment and Renegotiation," Econometrica, Econometric Society, vol. 63(3), pages 621-46, May.
  6. Michael L. Katz, 1991. "Game-Playing Agents: Unobservable Contracts as Precommitments," RAND Journal of Economics, The RAND Corporation, vol. 22(3), pages 307-328, Autumn.
  7. van Damme,Eric, 1987. "Stable equilibria and forward induction," Discussion Paper Serie A 128, University of Bonn, Germany.
  8. Steven D. Sklivas, 1987. "The Strategic Choice of Managerial Incentives," RAND Journal of Economics, The RAND Corporation, vol. 18(3), pages 452-458, Autumn.
  9. Mathias Dewatripont, 1988. "Commitment Through Renegotiation-Proof Contracts with Third Parties," Review of Economic Studies, Oxford University Press, vol. 55(3), pages 377-390.
  10. Fershtman, C & Gneezy, U, 1996. "Strategic Delegation : An Experiment," Papers 43-96, Tel Aviv.
  11. Segendorff, Bjorn, 1998. "Delegation and Threat in Bargaining," Games and Economic Behavior, Elsevier, vol. 23(2), pages 266-283, May.
  12. James A. Brander & Barbara J. Spencer, 1984. "Export Subsidies and International Market Share Rivalry," NBER Working Papers 1464, National Bureau of Economic Research, Inc.
  13. Cooper, Russell & Douglas V. DeJong & Robert Forsythe & Thomas W. Ross, 1993. "Forward Induction in the Battle-of-the-Sexes Games," American Economic Review, American Economic Association, vol. 83(5), pages 1303-16, December.
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