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Delegation and Information Revelation

  • Axel Gautier

    (IRES and UCL)

  • Dimitri Paolini

    (IRES and UCL)

This paper addresses the question of delegation in a principal-agent setting with asymmetric information. If the person who has the power to act, the principal, doesn't have the necessary information to make the best possible decision, she can address herself to someone, the agent, who has this information. Such delegation of authority has its drawbacks given that the agent may not implement the principal's ideal decision. Delegation is costly for the principal. This cost is called the loss of control. But delegation has also its benefits. We show that delegation is useful to reduce the initial asymmetry of information between the principal and the agent. The benefits of delegation are linked to the information transmitted by the agent to the principal. To show this, we model an organization composed of one principal and one agent. The organization should take a sequence of decisions that are affected by a common environemental parameter. We assume that there is an initial asymmetry of information between the principal and the subordinate agent: the agent knows the state of the world while the principal has only some prior about its distribution. Moreover, we assume that the principal cannot use revelation techniques la Baron Myerson to elicit agent's superior information. In contrast, we adopt an incomplete contract framework and posit that the decision and the state of the world parameter cannot be contracted for. Therefore, the remaining contracting variable is the allocation of decision rights. With these simple contracts, we study how the agent's decision can signal his information to the principal. When the agent is in charge of a decision, his decision signals his information to the principal. The trade off between information transmitted through decisions under delegation and the associated loss of control is the heart of our analysis.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1292.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:1292
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  1. Milton Harris & Artur Raviv, 1997. "Capital Budgeting and Delegation," CRSP working papers 452, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  2. Armstrong, M., 1994. "Delegation and discretion," Discussion Paper Series In Economics And Econometrics 9421, Economics Division, School of Social Sciences, University of Southampton.
  3. Crawford, Vincent P & Sobel, Joel, 1982. "Strategic Information Transmission," Econometrica, Econometric Society, vol. 50(6), pages 1431-51, November.
  4. Martimort, David, 1997. " A Theory of Bureaucratization Based on Reciprocity and Collusive Behavior," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(4), pages 555-79, December.
  5. Freixas, Xavier & Guesnerie, Roger & Tirole, Jean, 1985. "Planning under Incomplete Information and the Ratchet Effect," Review of Economic Studies, Wiley Blackwell, vol. 52(2), pages 173-91, April.
  6. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 1-29, February.
  7. Myerson, Roger B., 1982. "Optimal coordination mechanisms in generalized principal-agent problems," Journal of Mathematical Economics, Elsevier, vol. 10(1), pages 67-81, June.
  8. Leonardo Felli, 1996. "Preventing Collusion Through Discretion," STICERD - Theoretical Economics Paper Series /1996/303, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  9. John G. Riley, 1976. "Informational Equilibrium," UCLA Economics Working Papers 071, UCLA Department of Economics.
  10. Cho, In-Koo & Kreps, David M, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 179-221, May.
  11. Oliver Hart & John Moore, 1985. "Incomplete Contracts and Renegotiation," Working papers 367, Massachusetts Institute of Technology (MIT), Department of Economics.
  12. Jean Tirole, 1999. "Incomplete Contracts: Where Do We Stand?," Econometrica, Econometric Society, vol. 67(4), pages 741-782, July.
  13. Legros Patrick, 1993. "Information Revelation in Repeated Delegation," Games and Economic Behavior, Elsevier, vol. 5(1), pages 98-117, January.
  14. Jean-Jacques Laffont & Jean Tirole, 1985. "The Dynamics of Incentive Contracts," Working papers 397, Massachusetts Institute of Technology (MIT), Department of Economics.
  15. 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.
  16. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
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