Efficient Delegation by an Informed Principal
Consider the case of a firm with private valuation information bargaining with a supplier over the price and quantity of a good. If the firm and the supplier bargain directly, the bargaining outcome may not yield a first-best outcome due to the presence of information rents. The question we examine in this paper is whether these direct bargaining inefficiencies can be eliminated if the firm delegates the authority to negotiate with the supplier to an agent. We model the agent as an independent profit center that contracts with the parent firm as well as the supplier. The delegation of decision-making to the agent can influence the interaction between the firm and the supplier by altering the information rents the agent can claim from the supplier. To identify the role of delegation, we focus instead on two games. Both games have a continuum of equilibria, which we compare to the set of incentive efficient equilibria of the initial no-delegation bargaining game. The first game involves partial delegation as the firm controls the release of its private information through a public transfer price charged to the agent. Because the relationship between the agent and the uninformed supplier is one of full information, the unique equilibrium quantity is first-best yet we show that the informed firm still earns an information rent. The second game involves full delegation as the agent controls both the quantity choice and the release of the firm's private information. We show that the full delegation game has a large set of equilibria that includes all of the incentive efficient equilibria of the bargaining game as well as inefficient equilibria. We believe our notion of partial delegation can be reflected in firms organized as profit centers and the management practice of category management
|Date of creation:||11 Aug 2004|
|Date of revision:|
|Contact details of provider:|| Phone: 1 212 998 3820|
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
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.:
- Jean-Jacques Laffont & Jean Tirole, 1991.
"Privatization and Incentives,"
572, Massachusetts Institute of Technology (MIT), Department of Economics.
- Fershtman, Chaim & Judd, Kenneth L, 1987.
"Equilibrium Incentives in Oligopoly,"
American Economic Review,
American Economic Association, vol. 77(5), pages 927-40, December.
- Miles, James A & Rosenfeld, James D, 1983. " The Effect of Voluntary Spin-Off Announcements on Shareholder Wealth," Journal of Finance, American Finance Association, vol. 38(5), pages 1597-1606, December.
- Rochet, J. C., 1985. "The taxation principle and multi-time Hamilton-Jacobi equations," Journal of Mathematical Economics, Elsevier, vol. 14(2), pages 113-128, April.
- Baliga, Sandeep & Sjostrom, Tomas, 1998.
"Decentralization and Collusion,"
Journal of Economic Theory,
Elsevier, vol. 83(2), pages 196-232, December.
- Sandeep Baliga & Tomas Sjostrom, 1996. "Decentralization and Collusion," Harvard Institute of Economic Research Working Papers 1757, Harvard - Institute of Economic Research.
- Sandeep Baliga & Tomas Sjostrom, 1998. "Decentralization and Collusion," Discussion Papers 1210, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Andrea Prat & Aldo Rustichini, 2003.
"Games Played Through Agents,"
Econometric Society, vol. 71(4), pages 989-1026, 07.
- Ausubel, Lawrence M. & Deneckere, Raymond J., 1989. "A direct mechanism characterization of sequential bargaining with one-sided incomplete information," Journal of Economic Theory, Elsevier, vol. 48(1), pages 18-46, June.
- Rosenfeld, James D, 1984. " Additional Evidence on the Relation between Divestiture Announcements and Shareholder Wealth," Journal of Finance, American Finance Association, vol. 39(5), pages 1437-48, December.
- Fershtman, C. & Kalai, E., 1993.
10-93, Tel Aviv - the Sackler Institute of Economic Studies.
- Bernheim, B Douglas & Whinston, Michael D, 1986. "Menu Auctions, Resource Allocation, and Economic Influence," The Quarterly Journal of Economics, MIT Press, vol. 101(1), pages 1-31, February.
- Bond, Eric W. & Gresik, Thomas A., 1996. "Regulation of multinational firms with two active governments: A common agency approach," Journal of Public Economics, Elsevier, vol. 59(1), pages 33-53, January.
- Spulber, Daniel F., 1988. "Bargaining and regulation with asymmetric information about demand and supply," Journal of Economic Theory, Elsevier, vol. 44(2), pages 251-268, April.
- Schipper, Katherine & Smith, Abbie, 1983. "Effects of recontracting on shareholder wealth : The case of voluntary spin-offs," Journal of Financial Economics, Elsevier, vol. 12(4), pages 437-467, December.
- 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.
When requesting a correction, please mention this item's handle: RePEc:ecm:nawm04:42. 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: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.