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Delegation in Long-Term Relationships

  • Miriam Schütte
  • Philipp C. Wichardt

This paper considers the e effcts of a two-period interaction on the decision of a principal to delegate authority to a potentially biased but better informed agent. Compared to the (repeated) one-period case, the agent's first period actions may also signal his type which in turn impacts wages in Period 2. As a result, biased agents have an incentive not to follow their own preferences in Period 1, thereby inducing the principal to delegate more often. Moreover, we find that, depending on the players' relative utilities and the wage schedule, long term relationships will increase aggregate welfare. Finally, to empirically support our findings, we analyse data from the German Socio-Economic Panel (SOEP) which show that temporary workers indeed experience less autonomy in their decisions.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.408062.de/diw_sp0480.pdf
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Paper provided by DIW Berlin, The German Socio-Economic Panel (SOEP) in its series SOEPpapers on Multidisciplinary Panel Data Research with number 480.

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Length: 36 p.
Date of creation: 2012
Date of revision:
Handle: RePEc:diw:diwsop:diw_sp480
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  1. Alonso, Ricardo & Matouschek, Niko, 2005. "Relational Delegation," IZA Discussion Papers 1454, Institute for the Study of Labor (IZA).
  2. Wouter Dessein, 2000. "Authority and Communication in Organizations," Econometric Society World Congress 2000 Contributed Papers 1747, Econometric Society.
  3. Bengt Holmstrom, 1999. "Managerial Incentive Problems: A Dynamic Perspective," NBER Working Papers 6875, National Bureau of Economic Research, Inc.
  4. Aghion, Philippe & Tirole, Jean, 1994. "Formal and Real Authority in Organizations," IDEI Working Papers 37, Institut d'Économie Industrielle (IDEI), Toulouse.
  5. Andrea Prat, 2004. "The wrong kind of transparency," LSE Research Online Documents on Economics 24712, London School of Economics and Political Science, LSE Library.
  6. Stephen Morris, 1999. "Political Correctness," Cowles Foundation Discussion Papers 1242, Cowles Foundation for Research in Economics, Yale University.
  7. Florian Englmaier & Ales Filipi & Ravi Singh, 2010. "Incentives, Reputation and the Allocation of Authority," CESifo Working Paper Series 2979, CESifo Group Munich.
  8. Bengt Holmström, 1999. "Managerial Incentive Problems: A Dynamic Perspective," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 169-182.
  9. Joel Sobel, 1985. "A Theory of Credibility," Review of Economic Studies, Oxford University Press, vol. 52(4), pages 557-573.
  10. Ottaviani, Marco & Sorensen, Peter Norman, 2006. "Professional advice," Journal of Economic Theory, Elsevier, vol. 126(1), pages 120-142, January.
  11. Benabou, R. & Laroque, G., 1989. "Using Privileged Information To Manipulate Markets: Insiders, Gurus, And Credibility," Working papers 513, Massachusetts Institute of Technology (MIT), Department of Economics.
  12. Alonso, Ricardo & Dessein, Wouter & Matouschek, Niko, 2006. "When Does Coordination Require Centralization?," CEPR Discussion Papers 5802, C.E.P.R. Discussion Papers.
  13. Rey, Patrick & Dewatripont, Mathias & Aghion, Philippe, 2004. "Transferable Control," Scholarly Articles 4481511, Harvard University Department of Economics.
  14. Mathias Dewatripont, 2006. "Transferable control," ULB Institutional Repository 2013/9649, ULB -- Universite Libre de Bruxelles.
  15. Ricardo Alonso & Niko Matouschek, 2008. "Optimal Delegation," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 259-293.
  16. Ricardo Alonso & Wouter Dessein & Niko Matouschek, 2008. "When Does Coordination Require Centralization? Corrigendum," American Economic Review, American Economic Association, vol. 98(3), pages 1195-96, June.
  17. Marco Ottaviani & Peter Norman Sørensen, 2006. "Reputational cheap talk," RAND Journal of Economics, RAND Corporation, vol. 37(1), pages 155-175, 03.
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