IDEAS home Printed from https://ideas.repec.org/p/ecm/wc2000/1270.html

Agency Problems and Commitment in Delegated Bargaining

Author

Listed:
  • Hongbin Cai

    (University of California)

  • Walter Cont

    (University of California)

Abstract

In many economic situations, delegates are hired to play games for their principals. The principal-agent literature focuses on agency problems in the delegation relationships. Following Schelling (1960), the delegation literature emphasizes the commitment effects of delegation contracts against a third party. But not much attention has been paid to the interactions between agency problems and commitment considerations. In the context of one-sided delegated bargaining, we analyze how a principal (a seller) should design the delegation contract in order to provide proper incentives for her delegate (an intermediary) AND gain strategic advantage against a third party (a buyer). We assume that there are both moral hazard and adverse selection problems in the delegation relationship and every player is risk neutral. In the absence of commitment effect, it is shown that a linear contract is optimal. When delegation contracts have commitment value, the seller can gain substantially by committing the delegate to a minimum price, above which she pays the delegate a commission. We show that the seller's strategic manipulation of the delegation contract may cause bargaining failures between the delegate and the buyer when the seller sets a minimum price exceeding some buyers' valuations. Furthermore, the interaction between commitment (through minimum prices) and incentives (measured by commission rates) depends on the nature of the agency problem. When the delegate exerts "bargaining effort" to increase his bargaining power against the buyer, incentives and commitment are substitutes and hence move in opposite directions as the environment changes. When the delegate exerts "marketing effort" to increase the change of finding a buyer, incentives and commitment are neither substitutes nor complements, so can be positively or negatively correlated. We also derive comparative statics of the model. Extensions to multidimensional efforts and unobservable contracts as well as applications to car dealerships are briefly discussed.

Suggested Citation

  • Hongbin Cai & Walter Cont, 2000. "Agency Problems and Commitment in Delegated Bargaining," Econometric Society World Congress 2000 Contributed Papers 1270, Econometric Society.
    • Handle: RePEc:ecm:wc2000:1270
    as

    Download full text from publisher

    File URL: http://fmwww.bc.edu/RePEc/es2000/1270.pdf
    File Function: main text
    Download Restriction: no
    ---><---

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. is not listed on IDEAS
    2. Xinjian Wu & Chao Yu & Suyong Zhang, 2022. "Quality level and outsourcing strategies in a three-tier low-carbon supply chain [Delegation vs. control in low-carbon supply chain procurement under competition]," International Journal of Low-Carbon Technologies, Oxford University Press, vol. 17, pages 980-990.
    3. Oliver Gürtler, 2012. "A Strategic Rationale for the Use of Sell–On Fees in European Sports," Journal of Sports Economics, , vol. 13(1), pages 76-84, February.
    4. Roland Kirstein, 2024. "Strategic delegation in Nash bargaining," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 45(2), pages 784-794, March.
    5. Gürtler, Oliver, 2006. "Contractual Incentive Provision and Commitment in Rent-Seeking Contests," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 100, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    6. Niu, Baozhuang & Chen, Lei & Zhuo, Xiaopo & Yue, Xiaohang, 2018. "Does buy-back induce more fashion sub-sourcing? Contract property and performance analysis," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 113(C), pages 22-37.
    7. Piccolo, Salvatore & Gonzalez, Aldo & Martina, Riccardo, 2014. "Endogenous residual claimancy by vertical hierarchies," Economics Letters, Elsevier, vol. 122(3), pages 423-427.
    8. Zehao Hu, 2014. "Financing Innovation with Unobserved Progress," PIER Working Paper Archive 15-002, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    9. Eric Picard & Alexander Zimper, 2022. "Moving from a bad to a good pricing regime: The South African private health care market," South African Journal of Economics, Economic Society of South Africa, vol. 90(2), pages 260-276, June.
    10. Daniel Cardona & Clara Ponsatí, 2015. "Representing a democratic constituency in negotiations: delegation versus ratification," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 45(2), pages 399-414, September.
    11. Eric W. Bond & Thomas A. Gresik, 2011. "Efficient Delegation by an Informed Principal," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(3), pages 887-924, September.
    12. Roland Kirstein, 2009. "Optimal Delegation in Nash Bargaining," FEMM Working Papers 09001, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    13. Zeng, Xiaohua & Dasgupta, Srabana & Weinberg, Charles B., 2014. "The effects of a “no-haggle” channel on marketing strategies," International Journal of Research in Marketing, Elsevier, vol. 31(4), pages 434-443.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecm:wc2000:1270. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christopher F. Baum (email available below). General contact details of provider: https://edirc.repec.org/data/essssea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.