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Optimal Delegation Under Unknown Bias: The Role of Concavity

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  • Noam Tanner

Abstract

A principal is uncertain of an agent's preferences and cannot provide monetary transfers. The principal, however, does control the discretion granted to the agent. In this paper, we provide a simple characterization of when it is optimal for the principal to screen by offering different terms of discretion to the agent. When the principal's utility is sufficiently concave, it is optimal for the principal to pool and to offer all agents the same discretion. Thus, for any number of agents and any distribution over agent preferences, the optimal contract is simple: the principal sets a cap and forbids actions above this cap (interval delegation). For less concave preferences, it is optimal for the principal to screen. The principal benefits by providing agents a choice between interval delegation and gap delegation, which allows for more extreme actions but prohibits intermediate actions. Moreover, we provide new intuition for the optimality of interval delegation when the principal knows the agent's preferences: the payoff distributions generated by sets containing gaps are mean-preserving spreads of those generated by intervals.

Suggested Citation

  • Noam Tanner, 2018. "Optimal Delegation Under Unknown Bias: The Role of Concavity," Supervisory Research and Analysis Working Papers RPA 18-1, Federal Reserve Bank of Boston, revised 30 Mar 2018.
  • Handle: RePEc:fip:fedbqu:rpa18-1
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    References listed on IDEAS

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    1. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    2. Kovác, Eugen & Mylovanov, Tymofiy, 2009. "Stochastic mechanisms in settings without monetary transfers: The regular case," Journal of Economic Theory, Elsevier, vol. 144(4), pages 1373-1395, July.
    3. Dezsö Szalay, 2005. "The Economics of Clear Advice and Extreme Options," Review of Economic Studies, Oxford University Press, vol. 72(4), pages 1173-1198.
    4. Gilligan, Thomas W & Krehbiel, Keith, 1987. "Collective Decisionmaking and Standing Committees: An Informational Rationale for Restrictive Amendment Procedures," Journal of Law, Economics, and Organization, Oxford University Press, vol. 3(2), pages 287-335, Fall.
    5. Mylovanov, Tymofiy, 2008. "Veto-based delegation," Journal of Economic Theory, Elsevier, vol. 138(1), pages 297-307, January.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Non-transferable utility; Dynamic mechanism design; Sequential screening; Optimal delegation;

    JEL classification:

    • D20 - Microeconomics - - Production and Organizations - - - General
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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